Sunk Cost Fallacy and Opportunity Cost Neglect

Of all the behavioral science concepts I have introduced in this series, sunk cost fallacy and opportunity cost neglect are the two I genuinely struggle with myself. I know these biases very well. I can explain them, teach them, spot them immediately in others, and, as a matter of fact, I can even see the bias while it is happening in myself. Yet I still struggle with them almost every day. Why?

Knowing about sunk costs and opportunity costs does not remove their pull, because the difficulty lies not in understanding the economics, but in the psychology. Let’s explore.

My own two cases

The first is small and daily. I spend an inordinate amount of time researching and writing. It is real work, it is the channel through which most of my clients find me, and it produces something I can use back in client work.

I also know that I am underinvesting in outreach, and that people who could use my help are not hearing from me because those hours went somewhere else. An hour spent on an article is an hour not spent in a conversation with someone who has a problem I could help with. I know that this is opportunity cost neglect, yet here I am writing another article.

The second is more fundamental, and I have been sitting with it for years.

My organization development business presents a harder version of the same problem. Over the years, I have developed expertise across coaching, facilitation, team development, change and transformation, innovation, agile ways of working, conflict mediation, and several other areas, and I do this work at all levels in an organization, from the CEO to the factory floor. I also have a broad individual coaching practice, including a specialization in neurodiversity coaching, and an active teaching practice with students of all ages. The average age of my latest class at INSEAD was 63, which has even drawn me into the field of longevity education.

I developed each of these areas as a professional practice rather than simply collecting certificates, and I can credibly operate as a specialist in any one of them. But I also know the strategic problem this creates. I am a jack of many trades, and the very breadth that gives me versatility can also prevent me from becoming known for a smaller number of things.

I know this, but I do not want to give up any of these specialties because I am passionate and deeply vested in all of them; they are part of my professional identity. So I keep on investing equally in everything.

This is sunk cost fallacy in plain sight. The years I have already put into developing these capabilities make reducing my future investment feel like giving something up, or even wasting part of what I have built. Past investment starts influencing where I put the next unit of time and attention.

In both cases, I am fully cognisant of the problem. I can see the bias, name it, and explain exactly what I should probably do differently. Yet I still do not take the corrective action.

Simple in theory, difficult in practice

A sunk cost is something already invested that cannot be recovered. From a purely rational economic standpoint, sunk costs should not influence future decision-making because those resources are gone regardless of what choice we make next. The decision should instead be based on future costs and expected future benefits. Sunk cost fallacy occurs when the resources we have already invested become a reason for continuing an endeavour, even though those past investments cannot be recovered (Thaler, 1980; Arkes & Blumer, 1985).

Opportunity cost is the value of the next-best alternative we give up when making a choice. Opportunity cost neglect occurs when we focus on the choice in front of us without adequately considering the alternatives it displaces (Frederick et al., 2009).

None of this is difficult to understand. Yet as my own two cases show, understanding is not where the difficulty sits. The psychology does not argue with the economics, it simply outweighs it. Let’s take a detailed look.

Why knowing does not release us

In the simplest terms, these biases happen because our emotions are attached to the past and the present, and detached from the future. Imagining a future and its outcome is hard to do, let alone imagining what it would actually feel like (with the exception of worry, which is a feared future reaching back), while our feelings about what we already have and have done are real and present. In hot-cold empathy gap language, the past and the present are hot, while the future is cold.

Attached emotions: What we already have, have done, or might lose

Stopping makes the loss real. Continuing preserves hope that the investment may still pay off; stopping closes that possibility. This is loss aversion from prospect theory: the psychological pain of losses is roughly twice as powerful as the pleasure of equivalent gains.
Persistence feels virtuous. Sunk-cost thinking often presents itself as commitment, diligence, loyalty or finishing what we started, rather than as a bias.
We believe we can do better next time. Persistence often rests on a reasonable belief that we can put in more effort, learn from the last attempt and improve, and often that belief is correct. The trouble starts when pride takes over. The charged focus of “I can do this” crowds out the question of whether this is still worth doing, and we stop considering better ways of doing it or different things to do instead.
Past effort carries meaning. Time, money and effort come with pride, sacrifice and attachment, so letting go can feel like declaring that investment wasted.
Identity gets involved. Skills, projects and specialties can become part of who we are, making reallocation feel like giving up part of ourselves.
Indecision carries less emotional cost. Stopping requires an act and an explanation; carrying on usually requires neither. Deferral is emotionally less taxing and wins by default.

Detached emotions: The future is hard to imagine

Stopping to reflect takes maturity. When we are grinding our way executing, solving problems and trying harder, our attention stays inside the current path. It takes maturity and deliberate effort to self-interrupt and ask, “Am I doing the right thing?” and “Am I doing it the right way?” (ref: Knowing to Stop).
Alternatives are invisible. What we have now is right in front of us; what we might create by choosing differently does not yet exist. Between a visible current path and an invisible future alternative, it takes considerable conviction to back the latter.
Imagining alternatives is a capability. Even when we pause, better alternatives do not simply appear. Generating credible options draws on curiosity, experience, perspective and imagination. Some people are considerably better at it than others. It is a capability, not only a willingness.
The future is uncertain. What we already have is familiar and tangible, while another path may or may not deliver what we hope.
Future gains are hard to feel. We may understand intellectually that another path could create more value, but imagining what that future would actually look and feel like is much harder.
We rarely regret an unlived future. Regret only creeps in when the future arrives and we become cognisant of the alternative path then. Avoiding future disappointment is for this reason rarely a strong enough incentive.

Organizations amplify the problem

What is difficult at an individual level becomes harder in organizations, because investments acquire social ownership. A project has a sponsor, a team, targets, presentations and people whose credibility may now be tied to its success. By the time somebody asks whether it should continue, the decision is no longer only about money. The real exposure can be social. Pride, reputation, consistency and face can all become attached to the investment, making it harder to reconsider even when everyone understands perfectly well that the money already spent is gone. Barry Staw’s 1976 research on escalation of commitment showed that people can commit more resources after receiving negative results, particularly when they were personally responsible for the original decision. The financial logic may be clear, but the social exposure is different.

Organizations also amplify opportunity cost neglect because the current path is highly visible while the alternatives are not. The existing initiative has a name, a team, a budget, milestones, dashboards and people speaking for it. The alternative is often invisible, because nobody has been asked to produce it. “What if?” is never discussed, so the opportunity cost of the alternative path not taken is never surfaced.

In that sense, organizations do not merely inherit our individual biases. Their structures can reinforce them. Existing commitments become emotionally, socially and operationally “hot”, while alternative futures remain comparatively “cold”.

What to do

First, by the time we are in the meeting room making the decision, the past is emotionally present and the alternative is already absent. The counteractions below are therefore best carried out as a deliberate exercise, at a time when attachment, pride and momentum are less intense.

Second, if the past and the present run hot while future alternatives stay cold, then telling ourselves to be more rational is unlikely to be enough. As an overarching approach, my recommendation is to work on both sides of the imbalance: cool the past so that it exerts less pull, and warm the future so that alternatives become real enough to compete.

Cool the past

Hit the reset button. Ask: “If I inherited this situation today, knowing what I know now, what would I do next?” Removing your own authorship from the question is what makes it useful. It lets you assess the situation on its merits, with less emotional baggage from the history. If needed, bring in someone who is not attached for an impartial view.
Ask before trying harder. When the instinct is to keep going, first ask “Is this still the right thing to do, or are there better alternatives?” If you decide to continue, ask next “What would a genuinely different approach look like?” “I can do this” can be a useful source of persistence, but it can also keep us from asking whether we are doing the right thing, or doing it the right way.
Make changing your mind cheaper. “This made sense then, but I would choose differently now” should be an acceptable thing to say out loud. If changing direction is treated as evidence that the original decision was a bad one, people will naturally defend the past longer than they otherwise might.
Separate the time from the experience. The time, money and effort already spent cannot be recovered, but they may have left behind capabilities, knowledge, relationships or partial progress that still carry value. Making the call to stop is painful, but not everything is lost. Much of what you have learned or built can still be carried forward into the next decision.
Decide the stopping criteria while you are still cold. Set stopping criteria for any large-scale work you take on, either as a general rule or project by project. For work already under way, do it now, while you have a moment to step back from the delivery itself. For new projects, build the criteria into the plan from the start, identify the evidence you will monitor, and make the review points explicit in the budget approval process.
Treat deferral as continuation. Remove the “free option” of postponing a decision by treating deferral as an explicit decision to continue. Make the cost of that continuation visible, so that “not deciding yet” is recognised as an actual choice.

Warm the future

Build in a pause. Reflection is a cognitive meta-skill. We do not do it enough, and I encourage everyone to built it into their lives as a regular practice. When we step out of our current path and pause to ask fundamental questions such as “What’s important?”, we give ourselves the opportunity to redesign our future.
Use imagination liberally. Thinking of future alternatives require a great deal of imagination. Imagination is a capability, and like any capability, it develops through use. Build the habit of exploring possibilities regularly, rather than waiting until you urgently need an alternative.
Develop alternatives in parallel. While working on your main path, allocate a small amount of your capacity to exploring alternatives. This is an exercise called scenario planning, and it is a systems thinking tool. When a critical moment arrives, it is difficult to generate good alternatives on the spot under pressure. Scenarios thought through in advance will come in handy then.
Make the alternatives visible. Do not stop at “What else could we do?” Generate specific, credible options. Opportunity costs remain abstract until we can point to what the same time, money or attention could actually be used for instead.
Give the alternative an owner. In organizations, the current initiative already has people speaking for it; the alternative often has nobody. Assign someone to develop the competing option, so that when the time comes to run a comparison there is a person who can present it as a well-formulated opportunity rather than a vague possibility.
Shrink the bet. Running a small experiment on an alternative before deciding a full switch is a prudent move. Lowering the cost of finding out stops uncertainty from being a reason to stay on course.
Bring the future forward. Imagine each path one or two years from now. What would you be glad you had started, stopped or reduced? What might you regret still doing? What could become possible if resources were freed? We cannot remove uncertainty, but we can make the future less invisible and feel some of it in the present.

The next decision

At the very beginning of this Dōjō series, I touched on the relationship between behavioral science, behavioral economics and decision science. They overlap, but I find the distinction useful. Behavioral science helps us understand how people actually think and behave; behavioral economics shows how those behaviors can depart from the assumptions of purely rational economic models; decision science asks the practical question that follows: given all of this, how can we make better decisions? Not by asking us to eliminate emotion or become perfectly rational, but by helping us create better conditions for judgement.

Sunk cost fallacy and opportunity cost neglect pull in opposite temporal directions: one makes the past too powerful, while the other makes the future too weak. Good decision making requires correcting both.

So for your next decision: cool the past, and warm the future.

Use Time and Tradeoffs to Your Advantage

Behavioral Science for Emotional Intelligence, Part 3 of 4

In 2026, I am running a four-part “Behavioral Science for Emotional Intelligence” series through our free Mental Model Dōjō.

This article was prepared as a pre-read for the third session in the series, “Use Time and Tradeoffs to Your Advantage”, on September 22, 2026.

The session features four behavioral science concepts: present bias & hyperbolic discounting, planning fallacy, sunk cost fallacy & opportunity cost neglect, and goal-gradient effect. Pre-reads for the other three concepts are available through the session information and sign-up link below.

Session Info & Sign-Up