Broadly speaking, a sunk cost refers to an investment or allocation of resources that has already occurred and can't be recovered. The money has been spent. The time has been taken up. Most economists will tell you that sunk costs are irrelevant to future decisions. What's done is done. However, in reality, letting go of something after we've already invested considerable time or money can be challenging, even when letting go is clearly the best course of action. This is true in business, just as it's true in life.
Imagine that you bought a house as a fixer upper project. The initial excitement and emotion propelled you forward and you began making the desired changes to create your dream home. You recognized your own limitations and brought in experts for various trades. In the process of addressing some foundation concerns, you discovered that the foundation was fatally cracked in numerous places. The only option to ensure a safe house would now be to spend the money to lift the house and pour a new foundation. Based on the money you've already invested, the clear best choice would be to cut your losses and sell the house or tear it down and start over. However, your emotions win the day and you go into further debt repairing the foundation. It just felt like the right thing to do. If you're a fan of the BBC show "Grand Designs", you've seen this play out countless times!
This is an example of the sunk cost fallacy. Our tendency to follow through on a project if we have already invested time, money, and effort, regardless of whether the costs outweigh the benefits. We can all probably think of instances where we have fallen victim to this fallacy. It may not be to the degree of the previous example, but the examples are definitely there. Think about past relationships that lasted a bit too long, or the job you couldn't quite bring yourself to quit.
Admitting something didn't work out can be challenging. It's human nature to assign blame and we are often quick to blame ourselves for circumstances outside of our control. We want to believe we have full control over our lives. This is partly why we stay in bad jobs or bad relationships longer than we should. We want to see that time, money, and effort as being worth something and that becomes hard if we no longer have the role that prompted it in the first place.
If we can start to more regularly recognize that our sunk costs are in the past and make the decisions that are best for us in the moment, we can't not find ourselves happier and more present. We will invest time, money, and energy in the relationships that feed our souls. That will most certainly circle back around to benefit those things and people we continue to invest in as well. What's one sunk cost you can walk away from today?
