How to Avoid the Sunken Cost Fallacy in Decision-Making

1. What is this in one sentence?

The sunken cost fallacy is the tendency to continue investing in something because of the time, money, or effort already spent, even when the current and future outcomes look unfavorable.

2. What it means to businesses

For businesses, this fallacy creates a dangerous attachment to poor-performing projects, products, or strategies simply because they have already cost significant resources. It distorts rational decision-making and traps businesses into further losses.

3. Customer opportunity

Understanding the sunken cost fallacy presents an opportunity for businesses to help customers make smarter choices. For example, companies can offer solutions that help customers move on from ineffective products or contracts, positioning their brand as a problem-solver that values customer success over sunk investments.

4. Business threat

The greatest threat for businesses is staying committed to failing initiatives—whether it’s a product launch, a marketing campaign, or a partnership—because of the money already spent. It wastes resources, slows innovation, and can harm long-term profitability.

5. Business examples of this effect

• Concorde Aircraft Development

The Concorde jet project is a classic example of the sunken cost fallacy. Despite spiraling costs and evidence that the aircraft would never achieve profitability, the UK and French governments continued pouring money into its development. The reasoning? They had already spent too much to stop.

• Blockbuster vs. Netflix

Blockbuster famously ignored opportunities to pivot toward digital streaming. They had already invested heavily in physical rental stores, which made leadership reluctant to shift focus—even as Netflix grew. Their failure to break free from sunk costs ultimately led to their collapse.

6. How can we use data to maximise this effect?

• Identify Performance Metrics Early: Use data to continually evaluate the return on investment (ROI) for projects, campaigns, or partnerships. By defining clear success metrics from the start, you can objectively determine when to pivot or stop.

• Scenario Modeling: Use predictive data analytics to model potential outcomes, helping leaders base decisions on future projections rather than past investments.

• Regular Reviews: Implement periodic reviews of resource-heavy initiatives. Transparent reporting ensures decisions are made on facts, not feelings.

• Customer Insights: For customers showing signs of the sunken cost fallacy (e.g., sticking to inefficient products), leverage purchase or usage data to suggest upgrades or alternatives that add value.

When is it best to use this technique?

It’s most valuable during strategic decision-making or performance reviews of major initiatives. Businesses should remain data-driven and detached from past investments, focusing instead on future returns. When interacting with customers, identifying sunk costs can allow companies to reframe value and offer solutions that genuinely meet customer needs.

By understanding and addressing the sunken cost fallacy, businesses can act decisively, save resources, and guide customers toward smarter decisions.