Is Sunk Cost Bias Affecting Your Spending Decisions?

Untitled design (77)

Patty Hansen

A sunk cost is simply money, time, or resources that you have already spent and can’t get back. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions.
One example is when you have already invested a lot of time and money in a losing project. You continue to do so even if the benefits are not worth it. Let’s say you have spent a lot on car repairs. You continue to repair the car, digging a deeper and deeper hole. Buying a new car would be the better decision because the benefits would outweigh the costs, but you are still emotionally (and irrationally) attached to all the money you spent on the clunker.
You can also fall into the sunk cost trap with relationships. Let’s say you have an employee that is a borderline performer. You keep investing in them, thinking you can “fix” them, and they don’t improve. You should have fired them a long time ago! Scientists Daniel Kahneman and Amos Tversky studied cognitive bias, including the sunk cost bias, in case you want to read more about the topic. Kahneman won the Nobel prize for his work.
How can you avoid falling into the sunk cost bias trap? Here are some ideas:
1. Be aware that it exists and it affects more of our daily activities than we realize.
2. Track key performance indicators regularly so that you can see whether you’re on or off track.
3. Detach emotionally, if possible, from your business project.
4. Set goals and milestones on your projects and have a “walk away” plan if things spiral out of control.
5. Stay future-focused.
Now that you’re aware of sunk cost bias, you can be more mindful when making financial decisions.
As business owners, we’d like to think that we make rational, logical decisions when it comes to our business finances. However, scientists have discovered that we have built-in biases in our brains and our thinking processes, and one of these biases is the sunk cost bias. Luckily at Team One Accounting, we take care of your needs Bias Free. Learn how you can get accurate and reliable information by having Team One Accounting help you with your bookkeeping needs! Give us a call to schedule a FREE 30 minute consultation or a 2 hour training session with us today!
March 22, 2023 | Patty Hansen | Comments Off on Is Sunk Cost Bias Affecting Your Spending Decisions? | ,
Categories: ,

Related Posts

Sizzling Savings – How to Maximize Business Tax Deductions Early

By Charlotte Van Dyck | Jun 18, 2025

By: Charlotte Van Dyck While many small business owners don’t start thinking seriously about taxes until the final quarter of the year, the truth is that your biggest tax savings happen when you plan ahead, and summer is the perfect time to do just that. With half the year already behind you, you now have…

Read More

The Cost of Waiting

By Charlotte Van Dyck | Jun 11, 2025

By: Charlotte Van Dyck Summer is often seen as a time to slow down, reflect, and regroup before the hustle of fall and the intensity of year-end tasks. For business owners, this seasonal lull presents a strategic opportunity: not just to plan ahead, but to take action on systems that have long needed attention. One…

Read More

Recession-Proof Your Small Business: Smart Moves to Make Now

By Charlotte Van Dyck | May 21, 2025

By: Charlotte Van Dyck At Team One Accounting, we know that economic uncertainty can create a lot of anxiety for small and medium-sized business owners. While no one can predict exactly when a recession might hit, preparation is key to building a resilient business that weathers the storm and emerges stronger on the other side.…

Read More