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

The Freedom Every Business Owner Wants Starts with Good Bookkeeping

By Charlotte Van Dyck | Jul 6, 2026

One of the biggest reasons people start a business is for freedom: to be your own boss, to build something meaningful, to create your own schedule, spend more time with family, or pursue work you’re passionate about. Ironically, many business owners find themselves feeling less free as their businesses grow. Instead of spending time on…

Profitability vs. Cash Flow: What’s the Difference?

By Charlotte Van Dyck | Jun 24, 2026

One of the most confusing and frustrating experiences for business owners is looking at a profitable Profit & Loss statement while simultaneously worrying about having enough money in the bank to cover next week’s bills. It seems impossible at first. If the business is making money, shouldn’t there be plenty of cash available? Not necessarily.…

The Hidden Cost of Making Decisions Without Good Data

By Charlotte Van Dyck | Jun 10, 2026

Every business owner makes decisions every day. Should you hire another employee? Can you afford to increase marketing? Is it time to raise prices? Should you expand, invest, or wait? The quality of those decisions depends on the quality of the information behind them. Unfortunately, when bookkeeping falls behind or financial reports are inaccurate, business…