The Sunk Cost Fallacy and Learning How to Quit

In plain English, the sunk cost fallacy is when you continue doing something just because you have already spent the time, money, or effort on it, even when it no longer makes sense to continue. That last part is the key. Even when it no longer makes sense.

The problem is simple. Your sunk costs are gone. You cannot recover them. You cannot negotiate with them. You cannot undo them. The past is out of your control. The present and future are not. Yet people constantly let yesterday’s decisions dictate tomorrow’s outcomes.

Let’s look at a few examples I see regularly in my own career and in conversations with friends.

Staying at a job you hate

I know many people working jobs they dislike. The reasons always sound familiar.

• “I already put X years into this company.”
• “I am almost at the next promotion.”
• “I do not want to start over.”

I understand that last one. Learning new systems, new names, new politics takes effort. It is uncomfortable. But if the culture is wrong, the growth is capped, or your compensation is stagnant, the X years you already invested are irrelevant to the next X years.

The decision to leave should be based on:

• Future earnings
• Future growth
• Future happiness
• Opportunity cost

Not past time invested.

I have been there. The promotion comes. The raise comes. You feel great for a few months. Then reality sets back in. The same environment. More responsibility. More stress. Work does not get easier as you climb. It gets harder.

If you hate the job today, a slightly bigger title will not fix it long term. Sometimes the rational move is to cut your losses and move on.

Finishing a degree you no longer want

Most people I know who switched degrees did so because they struggled academically. Very few switch because they realize they simply do not like the field.

I know two people who finished their degrees, worked briefly, and then went right back to school. That cost them a few extra years. They made that decision young. Today they are both happy in their fields and have zero regrets. That is the difference between ego and clarity.

Halfway through, you realize:

• The field is not for you.
• The job prospects are not what you expected.
• You dread the thought of doing this for the next 30 years.

But you continue because “I already paid for two years.” Those two years are gone whether you finish or pivot. The tuition is gone too. You cannot buy back time. You can earn more money. Sometimes cutting losses early saves you decades of dissatisfaction.

Holding onto a bad rental property

At the time of writing, condo prices in many Canadian cities have fallen significantly. In larger cities like Toronto, condos were heavily bought as investments. In our old building in the early 2010s, under 40 percent of the units were rentals. Ten years later, close to 60 percent were rental, i.e. investment units. Many of those owners are now facing falling prices and weak cash flow.

You bought a rental property. Now:

• Repairs are constant.
• Tenants are unreliable.
• Cash flow is thin.
• The property is worth less than before.

But you hold because:

• “I have already sunk so much into renovations.”
• “I will lose too much if I sell now.”

The renovations are sunk. The purchase price is sunk. What matters is future cash flow and future return on capital.

If you freed up that equity today, could it work harder somewhere else? If prices recover, when will that be? One year? Five? Ten? Will the appreciation offset the stress and carrying costs in the meantime? Sometimes selling, even at a loss, is the most rational move.

Staying in a business you started

This one is common in engineering and consulting. After five to ten years in the field, many people launch their own firm. A few years in, they realize:

• Revenue is modest and inconsistent.
• Stress is high.
• There is no scalability.
• The client base is thin.

But they keep pushing because:

• “I already invested three years building this.”
• “I cannot go back to working for someone else.”

The three years are gone. The real question is simple. If you had not built this business already, would you start it today under the same conditions? If the answer is no, that is your signal. There is no shame in stepping back, rebuilding relationships, strengthening your financial base, and trying again later from a stronger position.

Pride is expensive. Optionality is valuable.

A quick finance example

You buy a stock at 50 dollars. It drops to 30. You tell yourself you will sell when it gets back to 50. The market does not care about your purchase price. The only relevant question is this - If you had cash today, would you buy this at 30? If not, you are holding it for emotional reasons, not financial ones.

In Conclusion

You need to learn when to quit before it is too late. The most dangerous sunk cost is not money. It is time. Money can be earned again. Time cannot. Do not stay somewhere just to justify where you have been. Make decisions based on where you want to go.