Shopify blog
The sunk cost fallacy happens when you continue with a decision because of the time or money you’ve already invested, even when evidence shows it’s not working.
For example, you might keep pursuing a costly rebranding strategy as your online store’s sales decline.
Learn more about the psychological factors behind the sunk cost fallacy, and strategies for avoiding it in your own business decisions.
What is the sunk cost fallacy?
Sunk cost fallacy means continuing with a poor decision because of past investments, whether or not the current costs outweigh the benefits. Also called the sunk cost effect, sunk cost bias, or sunk cost trap, it can involve invested money, time, or effort that can’t be recovered.
Research into the sunk cost fallacy explains that a rational decision-maker should consider only the current costs and benefits. A cost-benefit analysis compares the expected benefits against the remaining costs. For example, a retailer may keep funding an unprofitable ad campaign because it has already spent thousands of dollars on the creative.
Examples of sunk costs
The sunk cost fallacy occurs often with business investments, according to The Decision Lab. Larger prior investments are more likely to trigger it than smaller ones.
Financial investments
A large initial investment can make it harder to change course. For example, a marketing manager may continue funding a paid advertising campaign that falls short of its goals because the business has already invested heavily in it.
Tracking marketing ROI shows how the campaign’s returns compare with its cost. Continuing to invest in a poor performer is often called “throwing good money after bad.”
Projects
Time and effort spent on a project can also become sunk costs. Months of product development can make abandoning a project feel wasteful.
Even after negative customer feedback, a merchant may push ahead to justify the time and effort already invested. Current demand and expected return on investment should determine the next decision. The law of increasing opportunity cost explains why allocating more resources to one project can increase the amount a business gives up in other areas.
Overhead expenses
Past rent payments, utility bills, and insurance premiums are all sunk costs. When deciding whether to keep a store open, a business should compare projected sales with upcoming expenses. A break-even analysis calculates the sales volume needed to cover those expenses.
Psychological factors behind the sunk cost fallacy
Walking away from an investment can feel like admitting that the time or money spent was wasted. In psychology, that reaction is linked to four factors:
Commitment bias
Commitment bias, also known as escalation of commitment, is the tendency to follow through on an earlier decision, regardless of whether it’s presently working. Public commitments can deepen it. For example, a business that announces a new customer relationship management system may keep using it after it proves to be a poor fit.
Loss aversion
Loss aversion is the tendency to give a loss more weight than an equivalent gain. Prospect theory shows that losses can weigh more heavily on decisions than equal gains. The pain of losing is psychologically about twice as powerful as the pleasure of gaining.
This imbalance can keep a business invested in a slow-selling product, for example, even when redirecting the budget offers better returns.
Framing effect
The framing effect describes how different ways of presenting a choice influences our decisions. Abandoning a course of action can feel like admitting failure, so people sometimes frame changing course negatively—even when the numbers show it to be the rational choice.
Cognitive dissonance
Cognitive dissonance is the discomfort caused by conflicting beliefs, attitudes, or behaviors. This can come up when poor results conflict with a decision-maker’s belief that their original choice was sound. Businesses may be more likely to continue investing in a poor decision if cognitive dissonance is high.
How to avoid the sunk cost fallacy
Avoiding the sunk cost fallacy starts before you invest. First, clearly define the desired result, and how you’ll measure it. Set a review date, then base your brand’s next decision on current results.
Set clear goals
Use SMART goals to make each of your business’s targets specific, measurable, attainable, relevant, and time-bound.
For example, an ecommerce business might set a SMART goal to increase the conversion rate for a paid advertising campaign from 2% to 2.5% within six weeks. The goal focuses on one campaign and uses a defined metric, making it specific and measurable. Benchmarking can help the business set an attainable target by comparing its performance with similar businesses.
Shopify Analytics lets you set numeric targets for metrics such as gross sales, orders, or conversion rate. A target gauge tracks your progress over the chosen period.
Prioritize data
Focusing on real, grounding data can help you avoid the sunk cost fallacy. The Shopify Analytics dashboard summarizes your sales, sessions, and fulfillment data. You can compare results across different periods or open a metric card for a more detailed report. Shopify Sidekick can also pull the numbers you ask for, and display them as a line, donut, or bar chart.
According to the Shopify Survey of Store Owners conducted in Q4 2025, 77% of store owners track sales or total revenue.* Fewer than half track profit margin, traffic, average order value, or conversion rate. These metrics are important, because they show you whether a past investment is still paying off.
For pricing decisions, the economic surplus formula adds consumer and producer surplus to measure the total value created in a market.
Stay diligent
Set a schedule for reviewing costs and results. In the Q4 2025 Shopify survey, 41% of store owners said they review their finances daily.* Sixty-nine percent review them at least weekly.
At each review, ask yourself:
- Would I choose this option today based on its results?
- Do the expected benefits of continuing exceed the remaining costs?
Continue on the current path only when your expected benefits exceed the remaining costs, and your results meet the threshold set at the start. If either test fails, stop the work or redirect the budget.
*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.
Sunk cost fallacy FAQ
Why is it called the sunk cost fallacy?
The term “sunk cost fallacy” refers to costs—resources like time, money, and energy—expended or lost for good. “Fallacy” in this context refers to the false belief that continuing a course of action will lead to a better future outcome, even when the costs outweigh the benefits.
What’s the difference between a sunk cost and an opportunity cost?
A sunk cost is time, money, or effort already spent and impossible to recover. An opportunity cost is the value of the best alternative you give up. An opportunity cost example is the revenue forgone by funding one campaign over another. Sunk costs look backward, and opportunity costs look forward.
What is an example of the sunk cost fallacy?
A famous real-world example of sunk cost fallacy is a supersonic aircraft called the Concorde. The British and French governments funded it for decades during the late 20th century, despite clear indications that the sunk costs of the project outweighed the potential benefits.
How do you overcome the sunk cost fallacy?
You can overcome the sunk cost fallacy by setting clear goals, using data, and checking for cognitive biases in ecommerce before committing more resources.
Is the sunk cost fallacy always irrational?
Yes. The sunk cost fallacy is irrational by definition because it gives past costs weight in a current decision. Continuing an investment can still be rational when its expected future benefits exceed its remaining costs. In that case, the decision relies on future value over sunk costs.
