The Trap of Sunk Costs
“No matter how far you’ve gone down the wrong road, turn back”
- Turkish Proverb -
“I can’t give up now.” Sounds familiar? It sure does to me. “Just one more try” is another classic. I used to think persistence was always the key to success—proof of character and strength, destined to pay off in the end.
That was until I learned about the sunk cost fallacy in a university finance course. We’ve mentioned it already once before, in one of our first articles on risk. Back then, we didn’t spend much time on it, but today we will. It’s a simple yet powerful concept: we tend to stick with investments—of time, money, or effort—just because we’ve already put so much in, even when quitting would be the smarter choice.
Realizing this was a game-changer. Suddenly, I saw examples everywhere—including in my own decisions. So, today, we’re taking a quick break from analyzing Aris Water Solutions (don’t worry, Part I is here, and we’ll continue on Sunday) to dive into this cognitive bias.
Grab a coffee—and since you’ve already started reading, you might as well finish, right?
It Makes Sense…
From a human perspective, the sunk cost fallacy makes perfect sense. Even if you grasp it logically, actually acting on it feels completely counterintuitive. Let’s walk through a classic example—traveling.
You’ve been grinding for months, but finally, you’ve booked a well-earned getaway to a sunny paradise. Think sun, sea, and a fancy resort with amazing food. Expensive? Sure. Worth it? Absolutely. And since it’s one of those all-inclusive deals, you’ve already paid for everything upfront—no need to think about money once you arrive.
But then… reality kicks in. The resort is nothing like the photos. The food? Barely edible. And the sun? Apparently, it’s on vacation too. After two days, it’s clear—this trip is a disaster. Now, the logical move would be to cut your losses and change plans or even head home early. But do you? Of course not. You’ve already paid, so you might as well stay, right?
Intuitively, it feels like the right call: “You’ve already spent the money, so leaving would be a waste.”
Rationally, though? This is the sunk cost fallacy in full form—beautiful in its own twisted way. The money is gone, whether you stay or leave. What really matters now is maximizing your happiness. And if heading home early does that, then that’s the smarter move.
So why do we struggle with this so much?
Two key behavioral biases come into play: (1) commitment bias and (2) loss aversion.
First up, commitment bias—one I personally fall for all the time. Think of it as “marrying your own ideas,” which is a dangerous habit, especially in investing. Ever heard of “marrying a stock”? You don’t have to buy it an expensive ring, but the idea is the same. Commitment bias makes us cling to our beliefs and seek confirmation for them while conveniently ignoring contradicting evidence. Even worse, this often happens subconsciously, protecting us from the pain of admitting we were wrong. The problem? It can lead to costly mistakes that could easily be avoided by simply accepting when we’ve made a bad call.
In fact, changing your mind when necessary is an incredibly powerful skill—precisely because so many people struggle with it. George Soros, the legendary investor, put it perfectly:
Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.
Nail that mindset, and you’re already ahead of the pack.
Now, onto loss aversion, another behavioral classic. Tversky and Kahneman’s famous 1979 paper (look it up, it’s worth it) showed that we feel the pain of losing money much more intensely than the joy of gaining the same amount. In other words, losing stings harder than winning feels good.
How does this link to the sunk cost fallacy? Simple: abandoning an investment—whether it’s money, time, or effort—feels like a loss. Quitting means admitting you were wrong, and that’s tough. So instead, we often double down, throwing in even more resources just to avoid facing reality.
Humans can be weird, right?
But Not Always
Sticking With The Wrong Job
Imagine this: You’ve been at the same company for seven years. When you first started, it felt like the perfect opportunity—great learning experiences, career growth, and a solid paycheck. But over time, things changed. The work became monotonous, promotions stopped coming, and you no longer felt challenged. You dream of switching careers or starting something new, but every time you think about it, a voice in your head says, “I’ve spent years building my reputation here. I can’t just throw all that away.”
That’s the sunk cost fallacy in action. The time, effort, and energy you’ve invested in this job are already gone, whether you stay or leave. What really matters is whether this job still serves your future goals. If you’re only staying because of your past investment—not because it’s the right place for you—then you’re just delaying the inevitable. The smart move isn’t holding on to justify your past effort; it’s recognizing when it’s time to pivot toward something better.
Doubling Down
Now, let’s say you invested in a stock two years ago at €100 per share. At the time, it seemed like a great pick—strong fundamentals, promising growth. But now, it’s sitting at €40, and every sign points to continued decline. The smart move? Cut your losses and move on.
But instead, you tell yourself, “I’ve already lost too much—I’ll just wait until it bounces back.” So, you pour in more money, averaging down, hoping to recover what’s already gone. Meanwhile, new opportunities pass you by because you’re too focused on this stock, this investment, this decision you made in the past.
The money you’ve lost isn’t coming back. The only question is: Where is your money better spent moving forward? Just like in the career example, the key is knowing when to let go—because holding on for the wrong reasons can cost you even more.
Looking Ahead
At the end of the day, the key to overcoming the sunk cost fallacy—whether in careers, relationships, or investments—is shifting our focus from the past to the future. When valuing an asset, we don’t dwell on what we paid for it—we look at its future cash flows, its potential to generate value, and whether it still aligns with our goals. The same logic applies to life’s biggest decisions. What matters isn’t how much time, effort, or money we’ve already spent, but whether continuing down the same path still makes sense.
Of course, uncertainty is always part of the equation—none of us have a crystal ball. What will the future look like if we let go? Will the costs of change outweigh the benefits? These unknowns often keep us clinging to what’s familiar, even when it no longer serves us. But while we can’t predict the future with certainty, we can control how we respond to the present. The best investors, decision-makers, and thinkers know that rationality beats emotional attachment every time. They focus on what’s ahead, not what’s behind, and make decisions based on potential, not past sacrifices.
That doesn’t mean it’s easy. After all, we’re human. Even when we logically understand the sunk cost fallacy, actually acting on that knowledge is an entirely different challenge. Our biases—commitment bias, loss aversion, fear of regret—all push us to hold on longer than we should. But the more we practice recognizing these biases in real time, the better we get at controlling them. And the sooner we stop letting past investments dictate our future choices, the freer—and smarter—we become.
So, next time you find yourself thinking, “But I’ve already put so much into this,” stop and ask yourself: If I were making this decision for the first time today, knowing what I know now, would I still choose this path? If the answer is no, then maybe it’s time to let go.
📢 What about you? Have you ever struggled with the sunk cost fallacy in your career, investments, or personal life? Did you manage to walk away, or did you hold on longer than you should have? Share your thoughts in the comments—I’d love to hear your take! 👇
🔔 Don’t forget—our deep dive into Aris Water Solutions continues this Sunday. Subscribe now so you don’t miss the next analysis!
This also happens to entrepreneurs... it's hard.