The Sunk Cost Fallacy: An Economic Analysis
- 7 hours ago
- 3 min read
Written by Emir Taha Macit
The sunk cost fallacy is our tendency to go through with or follow something we have already invested time, money, or effort into, even though it has a high chance of yielding unfavorable results compared to simply giving up. This effect holds a significant place in economic decisions, as psychology is a great aspect of economics as a whole. This effect is not limited to individual expenses; there have been well-known examples of companies investing heavily in something only for it to fail in a foreseeable way. In this article, we will examine the causes and results of this effect, while also exploring some of its psychological aspects.
The sunk cost fallacy was first introduced by economist Richard Thaler in 1980 after years of research by various people on the topic of cognitive bias. Since then, it has been a pivotal thing to consider in most major investments. A common example provided to explain the effect is driving to a game in a blizzard. Say you have bought an expensive ticket to see a baseball game, but just as you start driving, you encounter a snowstorm. The options are as follows: keep driving so you can get your money’s worth by watching the game, or go back home to cut your losses and avoid the risk of accidents while also reducing the amount of gas prices you would have to pay. Human psychology suggests most people would keep driving, but in several variations of the situation, turning back would be a better idea. But the sunk cost fallacy affects more than personal expenses.
In corporate scenarios, the sunk cost effect takes place more often than most people think. It mostly occurs when companies invest large amounts of money and labor into a project or campaign, trying to go through with it because they believe they have invested too much to stop. Even when there is public disapproval, they often still decide to finish what they started. Examining various cases, we see that these situations could have been avoided with better economic decision-making. For instance, take the Concorde plane situation.
In 1956, the British government and various aircraft manufacturers decided to build a supersonic airliner, the project being named Concorde. Throughout the decades, the project managed to obtain substantial amounts of money from different sources, including taxpayer money. Even though the project garnered widespread attention and investments, it was not able to meet expectations. The project went on until 2003, 3 years after one of the planes crashed. There were many signs that this project was a sunk cost throughout various stages of its development.
First off, the project required trial and error, and faced political hardship, taking decades and consuming way over its expected budget, spending £1.2 billion instead of the expected £160 million. This easily could have been foreseen with better technological and political analysis. Second, as the project went on, they realized that they needed to add even more innovative features, hinting at the project being a sunk cost. They had to design new wings, a new paint for it to resist heat, a new nose for the pilots to be able to see the runway, and more. Third, when it first took off, it reportedly shattered the windows of some houses and produced a great amount of noise from breaking the sound barrier, resulting in public outcry. After all these challenges and more, the plane became functional and profitable for a short while. But, after a crash that happened in 2000 and the September 11 attacks, most passengers opted out of flying with Concorde, causing its manufacturers to finally terminate the project and retire Concorde in 2003.
In conclusion, the sunk cost fallacy is more prevalent in life and economics than we think. Whether it is investing in stock, supporting a project, or developing a product, the sunk cost effect is a crucial thing to know about oneself and human psychology in general. As we can conclude from examples such as Concorde, sometimes it is more profitable to stop and allocate your resources somewhere else, where you can earn back the finances you have lost.
References:
Caeleigh MacNeil, “How the sunk cost fallacy influences our decisions”, Asana, 2025, https://asana.com/resources/sunk-cost-fallacy
“The Sunk Cost Fallacy, explained.”, The Decision Lab, n.d., https://thedecisionlab.com/biases/the-sunk-cost-fallacy
Ali Hussain, “What Is a Sunk Cost—and the Sunk Cost Fallacy?”, Investopedia, 2025, https://www.investopedia.com/terms/s/sunkcost.asp
“The Economics of Concorde”, Etonomics, 2025,