What Is a Sunk Cost? The Sunk Cost Fallacy Explained

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

A sunk cost is money, time, or effort already spent that cannot be recovered. Because no future choice changes it, it should play no part in deciding what to do next.

Key takeaways

A sunk cost is spent and unrecoverable, so it should not decide what you do next.
Only costs and benefits that still differ between options are relevant.
Spending is sunk only to the extent it cannot be recovered.
Loss aversion, commitment bias, and the endowment effect make the fallacy hard to resist.

A sunk cost is money, time, or effort that has already been spent and cannot be recovered, whatever you decide next. Because no future choice can change it, a sunk cost is irrelevant to a forward-looking decision. The sunk cost fallacy is the error of letting that unrecoverable spending push you to continue a project, purchase, or plan that no longer makes sense on its future merits.

What Is a Sunk Cost?

In economics and managerial accounting, costs are sorted by whether they still depend on a choice. A sunk cost does not. It has been paid, and it stays paid whether you continue or quit. The term covers more than cash: hours spent learning a skill or months spent developing a product are also sunk once they cannot be reclaimed.

A personal example: you pay for a non-refundable eight-week online course, and by week two you realize you dislike it and it will not help your goals. The tuition is gone either way. The only question is whether the remaining six weeks of time and effort are worth what you would get from them.

How Sunk Costs Work in a Decision

Rational decision-making compares options using relevant costs: future costs and benefits that differ depending on the choice. A sunk cost is the same under every option, so subtracting it from each one changes nothing about which is best.

Not all past spending is fully sunk. If part of it can be recovered, only the unrecoverable portion is sunk:

Sunk cost = amount already spent − amount you can still recover (refund, resale, or salvage value)

Hypothetical example: a business buys a machine for $50,000. If it could resell the machine today for $20,000, then $30,000 is sunk. The $20,000 is not sunk; it is a value the business gives up by keeping the machine, which makes it a relevant cost of continuing.

Worked Example: Continue or Stop a Project

Hypothetical figures for illustration. A company has spent $2 million developing a product. Finishing it would cost another $1 million. If it stops now, it can sell the equipment and prototypes for $300,000.

Scenario A: finishing is expected to bring in $1.5 million of revenue.

Continue: $1.5 million − $1 million = +$500,000
Stop: salvage value = +$300,000
Continuing is better by $200,000.

Scenario B: new market research cuts the revenue forecast to $1.1 million.

Continue: $1.1 million − $1 million = +$100,000
Stop: +$300,000
Stopping is better by $200,000.

The $2 million never appears in the comparison. A manager who says “we have already spent $2 million, we cannot quit now” in Scenario B is committing the sunk cost fallacy: the money is gone either way, and continuing leaves the company $200,000 worse off.

The Sunk Cost Fallacy

The fallacy shows up as a student finishing a degree they no longer want, an investor holding a losing stock to “get back to even,” or a company funding a product the market has turned against. Behavioral researchers also call it the sunk cost effect.

Governments are not immune. The U.K. and France kept funding the Concorde supersonic airliner after it became clear that high costs and weak demand at high ticket prices would leave little or no economic return. That is why the error is sometimes called the “Concorde fallacy.”

The Role of Behavioral Economics

Loss aversion: losses feel more painful than equal gains feel good. Quitting makes an already incurred loss feel real, so people keep going in the hope that things turn around.
Commitment bias: reversing a decision means admitting the original choice was wrong. Justifying a past action to ease that discomfort is linked to cognitive dissonance.
Endowment effect: people value what they own, or have invested in, above its market value, so walking away feels like a bigger loss than it is.

Switching cost: a future cost of changing course, such as a cancellation fee, retraining staff, or migrating data to new software. Unlike a sunk cost, a switching cost is relevant because you pay it only if you switch. A legitimate reason to stay can be that switching costs exceed the benefit of switching, which is a very different argument from “we already paid for this.”
Opportunity cost: the value of the best alternative you give up. In the worked example, the $300,000 salvage value is an opportunity cost of continuing.
Fixed cost: a cost that does not change with output, such as rent. A fixed cost is not automatically sunk. Rent already paid is sunk, but next year’s rent can often be avoided by not renewing the lease.

How to Avoid the Sunk Cost Fallacy

Judge on future returns. Ask: “If I had not already spent anything, would I invest the remaining money and time in this today?”
Set limits before committing. An investor can decide in advance the price at which a stock will be sold. A business can tie further funding to milestone reviews and reevaluate when goals are missed.
Get an outside view. Someone with no stake in the original decision is less emotionally attached to it and can assess the prospects more clearly.

Limitations of the Concept

Ignoring sunk costs is a rule for the decision, not for learning. Past spending can contain useful information: a project that has consumed far more than planned may indicate that forecasts for the remainder are also too optimistic. Some consequences of quitting, such as reputational damage, contract penalties, or lost goodwill, are real future costs and belong in the analysis. The mistake is counting the spent money itself, not weighing these effects.

Classifying a cost as sunk also takes judgment. Specialized equipment or custom software may have little resale value and be largely sunk, while vehicles or office furniture can often be sold, leaving only part of their cost unrecoverable.

FAQs

How are sunk costs treated in accounting?

Past spending may still appear on financial statements, for example as depreciation spread over an asset's life. That allocation records history and does not change a forward-looking decision. Future cash effects linked to the asset, such as tax deductions or resale proceeds, can still differ between options and should be included.

The Bottom Line

Sunk cost thinking affects anyone deciding whether to keep funding a project, finish a course, or hold a losing stock. The sound approach compares only the future costs and benefits that differ between options, including salvage value and switching costs. Past overruns can still signal that remaining forecasts are too optimistic, but the spent money itself should never be the reason to continue.