Distinguish sunk costs from future opportunity costs

What you’ve already spent is irrelevant; what you’ll give up going forward is the only cost that matters.

Why it works

Sunk costs are past expenditures that cannot be recovered; they are economically irrelevant to forward-looking decisions. Opportunity costs are future-facing: the value of the best alternative you would pursue if you stopped the current course. Conflating the two produces the sunk cost fallacy — continuing a losing course to avoid "wasting" the prior investment. The discipline is to consciously zero out prior investment and evaluate only the future paths.

How to do it

1. When considering whether to continue something, list only what you will gain and give up going forward.
2. Explicitly note any prior investment and consciously set it aside from the forward-looking calculation.
3. Ask: "If I had not started this, would I choose to begin it now, knowing what I know?" If no, it should probably stop.
4. Apply this especially to projects, relationships, and investments that have required large past commitments.

Evidence

The sunk cost fallacy is one of the most robust and replicable findings in behavioral economics. Arkes and Blumer (1985) documented it in controlled experiments, and it has been replicated across many contexts. (rct)

Completely ignoring sunk costs is also not always correct — past investment can be evidence of past commitment or expertise worth preserving. The key is not to let it drive forward decisions.

Sources

• Arkes & Blumer (1985), the psychology of sunk cost, Organizational Behavior and Human Decision Processes

Common mistake

Saying "I’ve put so much into this, I can’t stop now" — which is precisely how the sunk cost fallacy operates. The correct statement is "I’ve put so much into this; what is the best path forward from here?"