Apply the new investor test
Ask: would a rational person who had not already invested choose to invest now?
Why it works
The new investor test removes the asymmetry between you (who carry the sunk cost’s emotional weight) and a fresh observer. If a well-informed outside investor would not put money or time into this project starting today, that is strong evidence that only sunk cost psychology is keeping you in. The test makes the counterfactual concrete and gives it a person — which is more cognitively tractable than abstract principle.
How to do it
- Imagine a knowledgeable investor who has no prior stake in the project.
- Brief them on the current state and future prospects — not the history.
- Ask: "Would they invest in this, starting from scratch today?"
- If no: their reluctance reflects the pure forward value, and your desire to continue reflects sunk cost.
Evidence
The new investor test is a practitioner tool derived from the sunk cost fallacy literature. Its mechanism — perspective-taking and counterfactual framing — has research support in the broader debiasing literature as a way to reduce in-group and self-serving biases. Kahneman and Lovallo (1993) show that adopting an outside view corrects the over-optimism that keeps people committed to their own faltering ventures, and Galinsky and Moskowitz (2000) demonstrate experimentally that perspective-taking reduces the self-serving favoritism the test is designed to bypass. (mechanistic)
Perspective-taking reduces but does not eliminate biased judgment; the test is most useful as a check rather than a definitive verdict.
Sources
- Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management Science, 39(1), 17-31.
- Galinsky, A. D., & Moskowitz, G. B. (2000). Perspective-taking: Decreasing stereotype expression, stereotype accessibility, and in-group favoritism. Journal of Personality and Social Psychology, 78(4), 708-724.
Common mistake
Briefing the imaginary investor on the history anyway ("and we’ve already invested two years...") which re-introduces the sunk cost through the back door.
Practice this with IX Coach
7 days free, then $40/month (~$1.30/day).
More practices for The Sunk Cost Fallacy: Escaping Bad Investments
- Zero out past investment before evaluating the forward decision
Explicitly set prior investment to zero and evaluate only what each future path offers from here.
- Set stop-loss policies before starting projects
Define exit criteria at the start, when you are not yet sunk.
- Separate your identity from the investment
The fact that you chose this doesn’t mean continuing is who you are.
- Actively watch for escalation of commitment
Each new investment in a losing course makes the next exit harder — catch escalation early.
- Use regret minimization as a forward-looking check
At 80, which will you regret more — stopping now, or having continued into a deeper hole?
- Calculate the ongoing cost of delay
Every day you continue a bad course is a day you could have started a better one.
Related concepts
- Opportunity Cost Thinking: What You Give Up When You Choose
The hidden price of every choice — and the practices that make it visible
- Expected Value Thinking: Deciding Under Uncertainty
The math of rational choice under uncertainty, its real limits, and how to use it anyway
- Thinking, Fast and Slow, Made Usable
Two systems, the biases they create, and when to slow down
- Loss Aversion, Made Practical
Why losses loom larger than gains — and how to reframe the decision