Imagine this: You buy a gym membership worth ₹25,000 for the year. After attending just a handful of sessions, you lose motivation. But you keep going occasionally, not because you enjoy it anymore, but because you’ve “already paid for it.”
This is a classic example of the Sunk Cost Fallacy, continuing with something not because it’s beneficial, but because you’ve already spent time, money, or effort on it.
In India, we see this fallacy everywhere: people holding on to underperforming stocks, keeping money locked in dud real estate projects, or even watching a terrible movie till the end just because they’ve paid for the ticket.
In this blog, we’ll dive deep into what sunk cost is, why humans fall prey to it, how it affects financial decisions, and, most importantly, how you can avoid it.
What Is a Sunk Cost?
A sunk cost is any past expense, whether in money, time, or effort, that cannot be recovered or reversed.
- In money: Buying shares at ₹1,000 each, only to see the stock fall to ₹500. The money spent is already gone.
- In time: Spending two years preparing for an exam, you later realize is not aligned with your career goals.
- In effort: Continuing a business that drains energy but provides no real returns, just because you’ve already “put in too much work.”
The key idea is that sunk costs are gone and should not influence future decisions.
Examples of Sunk Costs
Let’s look at some Indian-specific examples to make this concrete:
- Cinema Tickets
You buy a ₹500 ticket for a movie. After 20 minutes, you realize it’s awful. But you sit through the next two hours, thinking, “I already paid, I might as well stay.” - Underperforming Mutual Funds
An investor puts ₹1 lakh into a mutual fund in 2018. It consistently underperforms compared to peers. Instead of exiting, he sticks to it, reasoning, “I’ve already invested so much.” - Real Estate
Many Indian families buy a flat in a new project. The builder delays possession for years. Instead of cutting losses and selling, they keep waiting, thinking, “We’ve already paid 80%.” - Education Choices
A student realizes midway through an MBA that they don’t want a corporate job. Yet, they continue slogging through, justifying it with, “I’ve already spent ₹15 lakhs.”
These examples show how sunk costs trap us into decisions that are emotionally comforting but financially damaging.
What Is the Sunk Cost Fallacy?
The sunk cost fallacy happens when people let past investments dictate future choices, even when those choices don’t serve their best interests.
Instead of asking, “What is the best decision going forward?”, they ask, “How can I justify what I’ve already spent?”
This leads to irrational persistence in bad investments, toxic relationships, or unfulfilling careers.
Examples of the Sunk Cost Fallacy
Let’s see how this plays out:
- Stock Market
Ravi bought Yes Bank shares at ₹300. The stock falls to ₹50. Instead of cutting losses, he keeps holding, hoping it will “one day return.” Result: years of opportunity loss. - Business Ventures
A family opens a small restaurant. After two years, it barely breaks even. Instead of shutting it down, they continue to pour money, saying, “We’ve already invested ₹20 lakhs.” - Relationships
Someone stays in a toxic relationship because they’ve “already invested five years.” The past dictates their future. - Government Projects
Even the Indian government sometimes falls prey to this. Large infrastructure projects continue to receive funding, even when costs spiral out of control, simply because crores have already been spent.
History of the Sunk Cost Fallacy
The concept dates back to economists of the 18th and 19th centuries who argued that past costs should not influence rational decision-making.
- Adam Smith noted that people often “cling to losses” out of pride.
- In psychology, Richard Thaler, a Nobel laureate, highlighted the sunk cost fallacy as a cognitive bias that leads people to be irrational in economic decision-making.
In India, we see this in age-old sayings like: “Jo paisa doob gaya, uske peeche mat bhaago.” (Don’t chase money that’s already lost.)
Yet, despite cultural wisdom, most people still fall for it.
The Psychology Behind the Sunk Cost Fallacy
Why do smart people fall for this trap?
- Loss Aversion
Humans hate losing more than they like winning. Admitting a loss feels worse than the loss itself. - Emotional Attachment
We attach emotions to our investments, whether it’s a stock, a house, or a relationship. - Ego & Pride
Selling a stock at a loss feels like admitting, “I was wrong.” Ego resists this. - Hope & Optimism
People keep thinking, “Things will turn around.” This optimism biases decisions.
Why Is the Sunk Cost Fallacy a Problem?
Falling for sunk costs has real-world consequences:
- Financial Losses: Holding poor investments for too long.
- Opportunity Cost: Missing better options because money is locked elsewhere.
- Stress & Anxiety: Emotional burden of clinging to a bad choice.
- Wasted Time: Years spent in the wrong careers or businesses.
In investing, it’s hazardous. The longer you hold onto a bad asset, the greater the compounding of lost opportunities.
How Does the Sunk Cost Fallacy Work?
Here’s the cycle:
- You invest money/time.
- Things don’t work out as expected.
- Instead of reassessing, you double down to “recover” past losses.
- Losses deepen.
- Exit becomes harder.
This cycle traps countless Indian investors.
Why Does the Sunk Cost Fallacy Happen?
- Cultural Conditioning
In India, there’s a mindset of “paise ki keemat.” Walking away feels like “wasting money.” - Fear of Judgment
Investors fear relatives or friends asking, “Why did you sell at a loss?” - Illusion of Control
Belief that by holding on, they can somehow control the outcome.
How Susceptible Are You to the Sunk Cost Fallacy?
Ask yourself:
- Do you hold underperforming mutual funds because you “already invested”?
- Do you finish books/movies even when you dislike them?
- Do you stay in relationships or jobs longer than you should?
If yes, you’re likely falling prey to sunk cost thinking.
How to Avoid the Sunk Cost Fallacy
Here are practical steps:
- Focus on the Future, Not the Past
Ask: “What decision maximizes future benefits?” not “How can I recover past losses?” - Set Rules Before Investing
Example: “If a stock underperforms its benchmark for 2 years, I will exit.” - Detach Emotion from Money
Treat investments like tools, not relationships. - Use Professional Help
A mutual fund distributor or advisor can provide objective guidance. - Learn from Opportunity Cost
Always compare: “Could this money work harder elsewhere?” - Accept Small Losses
Taking a slight loss today is better than a huge one tomorrow.
Case Studies from India
Case Study 1: The Kingfisher Airlines Saga
Investors and banks kept pumping money into Kingfisher despite years of losses, because they had “already invested thousands of crores.” The result: total collapse.
Case Study 2: Retail Investor in Yes Bank
Lakhs of investors held on from ₹400 levels to below ₹50, refusing to book losses. Many still hold, missing out on other wealth-building opportunities.
Case Study 3: Mutual Fund Investors During the 2008 Crash
Some exited equity funds at a 40% loss, while others held on, saying, “We’ll recover.” The first group lost out on the 2009 rebound. The second group learned that holding because of sunk costs isn’t always rational; it must be based on fundamentals.
Final Words
The sunk cost fallacy is not just an academic concept; it’s a daily reality in investing, careers, businesses, and relationships.
In India, where family pride, social judgment, and emotional attachment are strong, we are especially vulnerable.
The key lesson?
👉 Don’t let the past control your future.
Past costs are gone. What matters is making the best possible decision today for tomorrow.
Break free from the trap, and you’ll save money, time, and peace of mind.
Disclaimer
The information provided in this blog is for educational and informational purposes only. Please consult a qualified financial advisor before making investment decisions.
VSJ FinMart is an AMFI-registered Mutual Fund Distributor (MFD) and does not offer investment advisory services. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before making an investment.