You’ve invested eighteen months and $2 million into a product that was supposed to revolutionize your category. Customer pilots came back lukewarm. Your team keeps finding reasons why next quarter will be different. But pulling the plug means admitting those 18 months were wasted—and nobody wants to be the executive who burned through capital for nothing.
Welcome to the sunk cost trap, one of the most expensive cognitive biases in business.
The Trap Is Behavioral, Not Logical
The sunk cost trap—often called the sunk cost fallacy—describes our tendency to continue investing in failing initiatives because of resources already spent, even when those costs are unrecoverable and should be irrelevant to forward-looking decisions (Arkes & Blumer, 1985). Economists would tell you that rational decision-making ignores sunk costs entirely. What matters is expected future value, not past spend (Kahneman & Tversky, 1979).
But executives aren’t calculating machines. We’re human beings navigating social pressures, identity threats, and political landmines—all while trying to make billion-dollar decisions with incomplete information.
Here’s what makes this bias so pernicious: It doesn’t feel like irrational behavior from the inside. It feels like commitment. Like follow-through. Like not being a quitter. Your psychological wiring convinces you that persistence is leadership, when in reality you’re just throwing good money after bad.
Why Smart Leaders Make This Mistake
Multiple behavioral mechanisms conspire to keep you invested in losing propositions (Brockner, 1992).
Waste aversion overrides self-interest. We’re hardwired to avoid appearing wasteful (Arkes, 1996). In the executive suite, this motive gets amplified. Budgets and strategic bets are public signals of competence. Walking away from a $2 million investment forces you to admit that $2 million is gone. Psychologically, we’d rather spend another $2 million with a 10% chance of success than accept a 100% certainty of loss.
Loss aversion makes stopping feel like failure. Losses loom larger than equivalent gains (Kahneman & Tversky, 1979). Abandoning an initiative means crystallizing a loss. The pain of that moment is acute. So we postpone it, reframe setbacks as “temporary” rather than “structural,” and keep funding.
Self-justification protects identity. This is motivated reasoning, not cognitive error (Staw, 1976). The more personally identified you are with a decision, the harder it becomes to reverse course. CEOs face especially high escalation pressure because their identity is inseparable from their strategic choices.
Political costs create exit barriers. Executive decisions are rarely private. When projects have internal sponsors, coalitions, and narratives, stopping creates political fallout—loss of credibility, coalition tension, the perception that you lack conviction (Whyte, 1986). The psychological price of exit can exceed the financial cost of persistence.
A comprehensive meta-analysis of decades of escalation research found that these dynamics intensify when negative feedback is ambiguous, when decision-makers feel high responsibility for the original choice, and when strong prior advocacy makes reversal socially costly (Sleesman et al., 2012). In other words, the exact conditions that define senior leadership.
The Business Cost of Bad Persistence
In organizations, sunk cost dynamics create predictable distortions:
Capital allocation errors. Companies continue funding initiatives that should be sunset because prior spend becomes the anchor for “what we must recover”—even when expected future returns remain poor (Brockner, 1992). The result: prolonged misallocation and delayed redeployment to higher-value opportunities.
Product and platform inertia. Legacy offerings persist beyond their competitive window because stopping forces recognition that earlier investments didn’t pay off. This is where sunk costs quietly become a tax on adaptability (Sleesman et al., 2012).
People decisions. The same trap shows up in hiring. You’re reluctant to exit an underperforming executive because of the investment already made—recruiting time, onboarding effort, reputational stakes. The psychological cost of admitting a hiring error outweighs objective performance signals.
Team-level escalation. Research shows that sunk cost honoring can occur even when costs were borne by someone else, suggesting the bias transmits socially through empathy and perceived fairness (Olivola, 2018). In leadership teams, this reinforces group-level persistence: “We’ve all put too much into this to stop now.”
The Question That Changes Everything
The most powerful debiasing technique is also the simplest. Before committing additional resources to any initiative, ask: “If we weren’t already invested, would we start this today?”
This reframes evaluation around future value rather than past cost (Arkes & Ayton, 1999). It forces you to compete your existing commitments against alternative uses of capital. It separates sunk costs from recoverable value.
The discipline of re-underwriting—repeatedly forcing investments to justify themselves on expected future returns—is what distinguishes organizations that adapt from those that defend yesterday’s thesis until it’s too late.
Structural Solutions Beat Motivational Ones
Telling executives to “be more rational” doesn’t work. The bias operates below conscious awareness. What does work is process design.
Pre-commit to exit criteria. Define what failure looks like before heavy investment. Clear metrics and decision gates reduce ambiguity and limit motivated reinterpretation (Sleesman et al., 2012).
Separate the builder from the evaluator. Escalation increases with personal responsibility. Independent reviewers or rotated evaluation ownership reduces identity-defense dynamics (Staw, 1976).
Normalize intelligent stopping. When exits are culturally punished, escalation becomes self-protective. Organizations that treat stopping as disciplined capital reallocation—not humiliation—reduce the emotional drivers of persistence (Brockner, 1992).
Use decision audits. Audits should distinguish sunk costs from future value and spotlight opportunity costs (Arkes, 1996). What else could you do with these resources? What are you not funding because capital is locked up here?
The Hardest Strategic Question
January is when most leadership teams finalize their annual operating plans. It’s also when last year’s underperformers get one more quarter to “turn things around.”
Here’s the reality: Most strategic failures aren’t failures of execution. They’re failures of attention. You keep funding what you’ve been funding because changing course requires admitting you were wrong—and that admission carries psychological, political, and reputational costs your brain is wired to avoid.
The strongest predictor of next year’s resource allocation isn’t expected return. It’s last year’s resource allocation. That’s the sunk cost trap in three sentences.
Building a company that grows requires repeatedly asking which bets deserve continued capital and which deserve intelligent abandonment. The hardest CEO decision is often not what to start—but what to stop.
Your past investments don’t determine your future options. Your willingness to walk away from them does.
About Rich Smith: Rich Smith is an executive advisor, behavioral marketing strategist, investor, and CMO known for helping leaders finally understand not only what strategies work, but why. With three decades of experience leading growth across financial services, healthcare, technology, and consumer brands, Rich has guided companies through crises, rebuilt brands from the ground up, and helped position organizations for nine-figure exits. Connect with him on LinkedIn, at RichSmith’s.blog, and The Revenue Science Podcast.
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