Let It Go: The Sunk Cost Fallacy and Smarter Spending
Imagine that you have trained for months to climb a mountain. Sacrificed your weekends. Maybe even told your friends and family - "This is it. I am climbing this mountain. I am finally doing this."
Now, you are halfway up a mountain. You are tired. The trail doesn't seem right. Then, it suddenly hits you: this isn't the mountain you meant to climb.
But still, you don't stop. You don't plan on returning to the base. Something keeps pulling you forward.
You think about the time you have already put in. The commitment, the dream, the energy, the social pressure, and so many other thoughts are running through your mind. Turning back now? It feels like a failure. It feels like a waste.
And so, not so surprisingly, you keep climbing the wrong mountain. You keep pushing forward, not because it's right, but because you have already come this far.
This phenomenon is far more common than you think, and psychologists have a name for it: the sunk cost fallacy. Psychologists Hal Arkes and Catherine Blumer (1985) first coined this term in a classic experiment. They showcased how participants made irrational choices simply because of prior investment.
What Is the Sunk Cost Fallacy?
The sunk cost fallacy is the tendency to invest in something not because it still makes sense, but because you have already invested in it.
This effect isn't limited only to the mountain climbers, though. This happens in our lives every day - in our finances, relationships, education, and even our digital subscriptions. Modern data suggests that paying for such digital subscriptions upfront can trigger the sunk cost fallacy in the minds of consumers. People who pay in advance tend to stick around longer, even if they are not really using the service. One experimental study showed that after a downward price adjustment, consumption increased by 12% to 35% within six months, suggesting that the users stayed engaged more to "get their money's worth" (Zhang et al., 2025).
We gaslight ourselves into thinking that stopping to invest would be "wasting" our money, time, and energy. While in reality, that cost is already gone. It's sunk, like a shipwreck at the bottom of the sea. Clinging to it doesn't raise it; it only drags us deeper.
In simple terms, the more we think "we can't afford to waste this investment", the more likely we are to make decisions that do not serve us.
Let's talk about another simple, real-life, relatable example.
The Concert Ticket Example
Imagine that you bought a concert ticket around two months ago. Now, the night has arrived, but you are exhausted, stressed, or maybe even sick. You don't feel like attending that concert at all.
But you still get dressed up, leave your comfy bed, and sit through the show. Why? Simply because you have already paid for it.
That's sunk cost fallacy in action.
Attending the concert even when you didn't want to doesn't get you your money back; It only costs you comfort, rest, and peace of mind.
That's why smarter spending means comparing the forward-looking trade-offs: "Would attending add value now?" or "Am I just trying not to 'waste' the ticket?"
Why Do We Fall for the Sunk Cost Fallacy?
Well, if the sunk cost fallacy seems so irrational, then why do we even fall for this? Let's discuss that.
Emotional Investment
"But I've already put so much into this."
Whether it's a class project, a relationship, or a monthly subscription, the more we have put our efforts into it, the more difficult it seems to walk away. Walking away starts feeling like admitting our defeat, even if continuing doesn't serve us anymore.
Fear of Regret
"What if I quit too soon?"
Hope is a good thing, but not always. Sometimes, we are hopeful that something might still turn around. We keep hoping that the reward is just around the corner. So, we keep going on, to delay cutting our losses, and often end up with more.
Identity and Pride
"I'm not a quitter."
We, as human beings, tend to associate our decisions with who we think we are. We don't want to be seen as a failure, a quitter, or an inconsistent individual. So we keep going, not out of logic, but out of our ego. This path of perseverance often ends up hurting us.
Loss Aversion
"But I don't want to lose out on this."
Psychologists Daniel Kahneman and Amos Tversky (1979) discovered that people don't treat losses and gains equally. We hate losing far more than we enjoy winning. This is called loss aversion, and it is a big reason why we cling to bad investments, be they financial or emotional. Even economist Richard Thaler (1980) showed that consumers often make irrational spending choices to avoid the feeling of losses, even if it results in actual losses. More recently, Shah, Shafir, and Mullainathan (2015) found that people experiencing financial scarcity are even more vulnerable to this trap, because the idea of wasting money becomes emotionally heavier.
So, to sum up, we fall for the sunk cost fallacy, not because we are weak or foolish, but because we are wired to avoid pain, protect our image, and justify our past actions. The problem isn't the emotion itself; It's letting our past efforts distort our vision of what actually makes sense now.
The Sunk Cost Fallacy and Your Finances
Let's take everything that we have discussed--the mountain climber, the concert tickets, the emotional pull of the past efforts--and bring it home to your finances.
Because the truth is, the sunk cost fallacy would affect your wallet more than anything else.
Holding Out to "Break Even"
"I'll sell this stock once it gets back to the price I bought it at."
If you have ever invested, even casually, you might have felt this. The stocks drop, the crypto dips, and then your brain whispers, "Don't worry, just wait. You can still get your money back." But here's the catch: the price you originally paid is irrelevant to the current value. If the outlook is bad, holding onto something just to "make even" doesn't save you money; It risks losing more. This is a classic example of sunk cost fallacy in financial behaviour.
This behavior is much more common than you think it is!
Some everyday examples of sunk cost fallacy at play:
- Subscriptions we won't use, but won't cancel either.
- Streaming Services we "might get back to" soon.
- Memberships we paid for but never used.
Each time we justify, "I already paid," before we think, "is it still worth it?", we let our past costs dictate our present actions.
And when real money is involved, such little decisions add up, especially as a student managing limited funds.
That $100 spent is gone. But you can still avoid losing out on the next $10, $50, or $200 you might throw in, just by accepting that $100 spent is gone.
The real cost isn't in the past, it's in what you keep paying.
When It's More Complicated: The College Major Dilemma
But sometimes, it really isn't as simple as "let it go."
Let's say you are three years into a college major that you no longer enjoy. You have changed. Your interests have shifted. Your priorities have changed. The classes seem more like chores than learning opportunities. But every time you consider switching, a voice pops up in your mind, saying, "I've already come this far. I can't stop now."
It might sound like a classic sunk cost fallacy situation, but it's much more complicated than that.
According to the U.S. Bureau of Labor Statistics (2024), earning a college degree, in any major, still leads to higher income and lower unemployment compared to not finishing at all. Even if you're unsure about your current track, completing a degree may offer long-term benefits, including access to careers, graduate programs, and professional networks.
Hence, quitting outright isn't always the right answer. Sometimes, the smarter move isn't to walk away, but to pivot strategically.
You might consider a few different options while you pivot:
Option A: Drop out completely
Would likely forfeit credits, lose progress, and carry debt without a credential, potentially limiting job prospects. More importantly, research suggests that students who drop out are significantly more likely to default on student loans. Without the earning bump that a degree typically provides, it becomes more difficult to pay off debts, which causes long-term financial strain. (PPIC, 2023; Pew, 2024)
Option B: Change majors now
Would lead to 1-2 extra semesters, delaying graduation, increasing tuition, and the opportunity costs, but may lead to a stronger alignment with your passions or job fit. For more on managing time-to-degree and smarter planning, check out our Cash at College webinar.
Option C: Finish your current major and pivot through electives, internships, or grad school
Allows you to finish the major on time, preserving your credits, while preparing you to pivot post graduation.
How to Make Better Decisions: Future-Focused Analysis
The goal isn't to undo what's been done; It's to optimize what's coming next. This is how you run a future-focused cost-benefit analysis. This is a great method to deal with the sunk cost fallacy. So whenever you start feeling like you are falling prey to the sunk cost fallacy, run a future-focused cost-benefit analysis, and ask yourself:
- What am I actually trying to achieve here?
- If I were to make this decision from scratch again, what would I choose?
- Have I gained skills, insight, or clarity from this experience, even if it wasn't the right fit?
- Is there a different path that still aligns with what I've already built, but points me toward something better?
Sometimes, your answer would be quitting.
Sometimes, your answer would be pivoting.
Sometimes, your answer would be - doing what you have already started, but with a fresh perspective.
Just remember: Letting go doesn't always mean giving up. It often means choosing a better direction, not abandoning the journey altogether.
Three Principles for Moving Forward
By now, we have climbed through stories, studies, emotions, and money decisions.
We have seen how the sunk cost fallacy can show up in unexpected places, from canceled concerts to college majors, from streaming subscriptions to career paths.
So how do you move forward without falling into the same trap again?
Here are three powerful principles to guide you forward, whenever you are standing at a decision point:
Start from where you are, not from what you have spent
Your next decisions should be based on what your current values, goals, and energies are, not what's already behind you.
Zoom out
Sometimes, the best way to see clearly is to step back, emotionally and practically. Research by Kross et al. (2014) shows that distancing yourself from the problem, by journaling, writing a pro/con list, or even talking to yourself in third person, helps us to cut through the emotional noise and make smarter decisions. For example, instead of asking: "Should I keep paying for this course I hate?", try asking: "What would I tell a friend stuck in the same situation?". That small shift helps us act by logic, not based on our past.
Redirect with intention
Letting go doesn't always mean giving up. It means refusing to pay for something that's not worth paying for anymore, and spending your time, energy, and money on what is.
Final Thoughts
Just because you have started, it doesn't mean you are obliged to finish. Realizing that you are on the wrong path isn't failure, it's clarity. You are not defined by what you committed in the past. You are defined by what choices you make with your current knowledge.
And whether it's your budget, your major, or your mindset - you always have the power to pivot with purpose.
Learn more about this topic with SMMC:
References
- Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Journal of Economic Behavior & Organization, 7(1), 1–15.
- Zhang, Mingyue; Bockstedt, Jesse; Song, Tingting; and Wei, Xuan (2025). Sunk Cost Fallacy, Price Adjustment, and Subscription Services for Information Goods. Journal of the Association for Information Systems, 26(2), 543-574.
- Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.
- Thaler, R. H. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60.
- O'Donoghue, T., & Rabin, M. (2001). Choice and procrastination. Quarterly Journal of Economics, 116(1), 121–160.
- Kross, E., et al. (2014). Self-talk as a regulatory mechanism: How you do it matters. Journal of Personality and Social Psychology, 106(2), 304–324.
- Bureau of Labor Statistics. (2024). Education pays, 2024. U.S. Department of Labor.
- Shah, A. K., Shafir, E., & Mullainathan, S. (2015). Scarcity Frames Value. Psychological Science, 26(4), 402-412.
- Public Policy Institute of California. (2023). Repaying student loans: A struggle for those who do not graduate.
- Pew Research Center. (2024). Who experiences student loan default?
