The ‘sunk cost fallacy’ goes beyond economics — it can keep you from reaching your biggest goals. Learn what this fallacy is, and how to beat it.
A Close Encounter with Sunk Costs
A few years ago, my husband and I signed a lease on a new rental that, at the time, made sense. Our previous lease was ending and we needed more space, lower rent, and to get out of the city. The trade-off was committing to a neighborhood we didn’t love, and a three-hour commute for me. Ouch. I’d been applying to jobs that would relocate us to a place we could really settle down, but it was hard to say when, or if, I’d get an offer.
Two days after we signed that new lease, I received an offer for a job in a fantastic location. When I went back to the rental agency to negotiate our lease, they said I would not only have to pay a lease-break fee, but that I was responsible for paying rent until a new tenant was secured and that I would only get back a portion of our deposit. We lived in that rental for just a few weeks, and it cost us thousands of dollars.
But four years later, here’s what that expense got us: a great house that we’re fortunate to own, in a great town, with great jobs, and a better lifestyle for us and our family. We reached our goals and have benefitted from that decision ever since.
I’ll never get those few thousand dollars back, but when I look at everything I gained by letting it go, I know that I made the right call to swallow the sunk cost and move on.
What Is the ‘Sunk Cost Fallacy’?
The term ‘sunk cost fallacy’ is often used in economics to describe an incurred cost (fiscal or otherwise) that can’t be earned back but that continues to influence behavior and decisions. The fallacy lies in trying to create more value for the cost by factoring it in to future choices.
This fallacy is demonstrated by remaining tied to costly choices — even if in doing so, you incur greater costs than just letting go of what’s already been spent. These costs can be emotional, financial, or time-based.
Passing on that job opportunity because of what I’d already invested in the rental lease would have been an example of falling victim to the sunk cost fallacy. I wasn’t getting that money back either way, and making a decision influenced by what had already been spent would have actually limited my ability to reach my goals in the long-term.
Why We Do It
Why do we fall victim to the sunk cost fallacy? One researcher says that “part of the reason may be that the future is unpredictable.” When faced with a decision to depart from the familiar and into the unknown, humans are often likely to choose the familiar path — even if it’s no longer serving them. In psychology, this behavior relates to evolutionary survival traits like avoiding the unfamiliar in favor of the known, or risking the loss of your standing in your community. It’s the same reason we let fear hold us back. It’s safer to stick with what you know, because you know you can survive it, even if you aren’t thriving.
There’s another layer to sunk costs that can make it even harder to overcome this fallacy. Hanging onto possessions, relationships, careers, or anything else that isn’t serving your goals is a form of cognitive dissonance. This occurs when you continue to do something that is harmful, even though you know better. People have a biological need for their world and place in it to make sense, so they will consciously or subconsciously do things to create sense and order — whether they are helpful or harmful. While cognitive dissonance can be a positive thing, it also has the power to keep you in our ‘safe zone’ and limit your growth and ability to tackle goals.
How Sunk Costs Hold Us Back
When facing a big goal, the sunk cost fallacy can stagnate progress, limit growth, and keep you from moving forward toward that goal.
Here’s why sunk costs are so hard to detach from: generally speaking, the more you invest in something (either in the form of time, money, or emotion), the less likely you are to move on from it, even if you aren’t getting a positive return on that investment. This is why people stay in careers they don’t enjoy, stay in relationships that aren’t fulfilling, or avoid taking that big leap toward reaching a goal.
Here are just a few examples of how this fallacy works in the context of goal-getting:
- Goal: Changing careers. Sunk Cost: Staying in an unfulfilling career because of student loans incurred or industry tenure
- Goal: Rebranding a business. Sunk Cost: Continuing with the old approach because of the work that’s been invested.
- Goal: Switching majors. Sunk Cost: Finishing a degree because of the courses already completed.
- Goal: Eat healthier. Sunk Cost: Eating the rest of the junk food in the house first.
The sunk cost fallacy can also hold you back from changing, switching, or altering your goals. Say your goal is to launch a podcast. You buy a microphone, you learn about the process, you conduct a few interviews….and then you come to find that you don’t enjoy interviewing as much as you thought, the technical process is frustrating, and you feel burdened rather than excited. Sunk costs can include the money spent on equipment, and the time spent learning a new platform. Perhaps you emotionally invested in the podcast by telling others about it.
Your best investment though, in the long run, is letting go of the podcast once you recognize that it’s no longer serving you or your goals. But that can be hard to do, especially if you feel like all your investments ‘were for nothing.’
What’s more, when you allow yourself to be limited by sunk costs, you may recognize what you’re doing…and do it anyways. That’s where cognitive dissonance comes in, and cognitive dissonance often comes with a hefty dose of guilt. When this happens, you’re not only stuck with the sunk cost of the initial investment, you’re continuing to put yourself into deeper emotional debt by hanging onto the guilt of the decision not to let go of that sunk cost.
Over time, the cost of the initial investment multiplies — and you’ll end up in far greater time, money, and emotional debt than if you’d walked away long ago. Put simply: the more you spend, the more you spend.
How to Overcome the Sunk Cost Fallacy
According to the Six Figures Under blog, “the magic of understanding sunk costs is that once a cost is sunk, it should have no bearing on future decisions” — and I couldn’t have worded it better myself.
If you find yourself falling victim to this fallacy, here are four tips for moving forward:
- Evaluate Your Earnings: Consider what you earned from the cost. That could include an experience you can use to make different choices in the future; a lesson that brings you new wisdom; or a better understanding of what you do or don’t need, like, or want. All of these ‘earnings’ can be used to help you make different choices in the future. Even if the cost is sunk, you can continue to reap the benefits of that investment, which might help you move on from the initial cost.
- Let It Go: If only it were that easy, right? But if you’re grappling with a sunk cost, or even if you’ve recognized a pattern of cognitive dissonance, the best thing you can do is walk away from the sunk cost that’s holding you back from your goals. To help you let go, try writing down the ways in which you’re grateful for that expense, and why you’re grateful for letting it go. What new door will be opened? What emotional burden will be lifted? What time and mental space will become available?
- Turn Inward: As yourself a few key questions to uncover the rationale behind your investment in a sunk cost. Try asking questions like, “What cost am I still holding on to that’s holding me back from reaching my goals?”, “How is this cost still serving me, or affecting me?”, “What could my reality become when I let go of this cost?”, and “What risk do I take by letting go of that cost, and moving forward? Is the risk greater than the reward?”
- Focus on the Best-Case Scenario: When you step into the unknown, you never know how it will turn out. But when you remain bound to sunk costs that hold you back, you’ll never know what you’ll miss out on. Fear of the unknown can be a powerful force, so when you feel ready to let go of sunk costs, focus on the best-case outcome that the new opportunities you’re embracing will bring. They may not come true, or the outcome may exceed your wildest expectations. But the power of your mind is that what you think influences what you experience, so stay positive and embrace whatever comes your way.
The Bottom Line
Sunk costs have the power to hold you back from your goals and greatness — if you let them. Overcoming this fallacy requires staying focused on the future, not on the past. What’s spent is spent — either in time, money, or emotional investment. Let go of that cost, and look ahead at what you stand to earn by facing your goals free from the burdens of your past choices.