The Sunk Cost Fallacy: Why You Are Holding Bad Investments Longer Than You Should

Last Updated on April 21, 2026 by Hemant Beniwal

“Sunk costs are not lost – they are already spent. The only decision that matters is what you do with your remaining money and time.”

A client came to me some years ago with a question I hear regularly: “I have been paying into this endowment plan for 11 years. It is performing terribly. But if I surrender now, I will get less than what I put in. Should I continue?”

I asked him: “If this policy did not exist and you had Rs 80,000 per year free to invest, where would you put it?” Without hesitation: “Mutual funds.” Then I asked: “Why are you not doing that now?” He paused. “Because I have already put in Rs 8.8 lakh. I cannot just walk away from that.”

That is the sunk cost fallacy. The Rs 8.8 lakh was already spent. It was not coming back regardless of whether he continued or surrendered. The only real question was: which decision makes more sense for the next 10 years with fresh money? The answer was obvious when he stopped anchoring to the past.

What Is the Sunk Cost Fallacy?

A sunk cost is a cost that has already been incurred and cannot be recovered. The sunk cost fallacy is the psychological trap of letting that irrecoverable past cost influence a current decision, when it should not.

The classic example: you are 30 minutes into a movie and it is terrible. Do you leave? Most people do not. They sit through 90 more minutes of misery because “I already paid for the ticket.” But the ticket money is already spent. Leaving or staying does not change that. The only real decision is: how do you want to spend the next 90 minutes of your evening? That has nothing to do with the ticket price.

Your brain evolved to track reciprocity – when you give something, you expect something back. This served us well in tribal societies. It serves us poorly in financial markets, where past commitment has no bearing on future returns.

“The sunk cost fallacy does not care about your retirement timeline. It will keep you in a bad endowment policy until age 60 just as happily as it keeps you in a bad movie until the credits roll. The cost is different. The psychology is identical.”

– Hemant Beniwal, CFP, CTEP | Founder, RetireWise

Where the Sunk Cost Fallacy Destroys Retirement Wealth

Insurance-investment products (endowments, money-back plans, traditional LIC policies). These are perhaps the single most common sunk cost trap I encounter in my practice. A client has been paying Rs 60,000 per year into a 20-year endowment plan for 8 years. Returns are 4-5% if they complete the term. The logical choice is often to surrender and redirect to mutual funds. But the mental accounting of “I have already put in Rs 4.8 lakh” prevents it. Result: 12 more years of 4-5% returns on new premiums plus the locked-in poor performance on the amount already paid.

The surrender calculation must be done clinically. Compare: current surrender value plus future mutual fund returns versus projected maturity value of the policy. In most cases beyond the 7th or 8th year of a long-term policy, continuing is actually the better mathematical decision because the heavy early charges are already absorbed. But in the first 5-6 years, surrendering a poor product is often correct despite the loss. The sunk cost fallacy prevents people from making that analysis at all.

Direct equity averaging on falling stocks. An investor buys 100 shares of a company at Rs 500, believing in the business. The stock falls to Rs 300. Instead of reassessing, they buy 200 more shares to “average down” and reduce their cost basis to Rs 367. The stock continues to fall to Rs 150. They are now holding 300 shares at an average cost of Rs 367, with a current value of Rs 45,000 against an investment of Rs 1.1 lakh. And the original investment amount is still driving the decision.

Averaging in individual stocks has a specific name in investment circles: “catching a falling knife.” It can be correct if the business fundamentals remain intact and the fall is purely sentiment-driven. It is dangerous when the fundamentals have deteriorated. The sunk cost fallacy prevents investors from distinguishing between the two.

Real estate decisions. A property bought in 2015 has not appreciated in 10 years. Rental yield is 1-2% of the purchase price. Maintenance costs are adding up. But “I paid Rs 80 lakh for this flat” prevents a rational assessment of whether the capital should be redeployed. The Rs 80 lakh is gone. The question is: does owning this property or selling it and investing elsewhere produce better outcomes for the next 10 years?

How to Overcome the Sunk Cost Fallacy

The mental model that cuts through sunk cost thinking is this: imagine you do not own the investment. Imagine you have the current value in cash right now. Would you buy this investment with that cash today, knowing what you know?

If you have an endowment plan with a surrender value of Rs 3.5 lakh, ask: would I invest Rs 3.5 lakh in this endowment plan today, with 8 years remaining, for the projected maturity amount? If the answer is no, the sunk cost fallacy is holding you there, not rational calculation.

If you own 200 shares of a company at an average of Rs 250 and it is now at Rs 180, ask: would I buy 200 shares of this company today at Rs 180? If yes, that is a separate decision from what you already own. If no, ask yourself why you are still holding it.

The “would I buy this today?” framing removes the psychological anchor of the original investment amount and forces a forward-looking analysis.

The Retirement Implication: Time Is Also a Sunk Cost

For a 50-year-old carrying a portfolio of bad financial decisions from their 30s and 40s, the sunk cost fallacy has another layer: time. The years spent in underperforming products cannot be recovered. But the next 10 years can still be directed differently.

The trap is this: “I have wasted 15 years in this endowment plan. The retirement corpus I should have is not where it needs to be. There is no point trying to fix it now.” That is the sunk cost fallacy applied to time. The past 15 years are gone. The next 10-15 years before retirement are fully available. How they are used from today determines the retirement outcome – not the decisions made in 2008.

Read – 5 Insurance Policies You May Not Need – And One You Must Never Drop

Read – The Real Key to Wealth Creation: Why Starting Early Beats Everything Else

Frequently Asked Questions

How do I know if I am stuck in a sunk cost trap with my investment?

Three diagnostic questions: First, would I buy this investment fresh today with the same amount? Second, am I holding it primarily because of what I paid, not what it is worth? Third, when I think about exiting, does my first thought go to the original purchase price rather than the current opportunity cost? If yes to any of these, the sunk cost fallacy is likely influencing the decision. Get the numbers on paper, model both paths, and make the decision based on future cash flows, not past commitments.

I have a ULIP with 5 years remaining. Surrender or continue?

For a policy within 3-5 years of maturity, continuing is usually the correct mathematical decision. The heavy early-year charges are already absorbed, and the remaining premiums are going mostly into the fund with minimal charges. The exception: if the fund performance has been consistently poor (bottom quartile across multiple market cycles) and surrender value plus future mutual fund returns clearly exceed projected maturity value after tax, surrendering may be justified. Model it specifically for your policy before deciding.

Is there a situation where sunk costs should matter?

In financial decisions, almost never. The exception is psychological: if the emotional cost of admitting a mistake is so high that it prevents you from making any further financial decisions, maintaining a bad investment temporarily while building confidence elsewhere may be preferable to paralysis. But this is a behavioural concession, not a rational argument for sunk costs. The goal is always to move toward forward-looking decisions as quickly as possible.

Every rupee you spend on a bad investment is a rupee that cannot go into a good one. Every year trapped in an underperforming product is a year not compounding in the right one. The sunk cost fallacy is not a small bias. For retirement investors in their 40s and 50s, it is one of the most expensive psychological errors in finance.

The past is gone. Manage what you can still control.