Escaping the Sunk Cost Fallacy: How to Know When to Fold a Losing Hand

A poker player at a high-stakes table, looking at a bad hand of cards, with a large pile of chips already pushed into the pot. The player's face is a mixture of frustration, contemplation, and the dawning realisation they need to fold.

It's a story I've seen play out time and again. A promising project, once the darling of the organisation, is now bleeding money and missing every milestone. The data is clear: the market has shifted, the technology is flawed, or the competition has outmanoeuvred them. Yet, instead of cutting their losses, the leadership team doubles down, pouring more resources into the failing venture. "We've already invested so much," they argue. "We can't just walk away now."

This is the sunk cost fallacy in action. It's one of the most insidious cognitive biases in business, a psychological trap that convinces rational leaders to make irrational decisions based on past investments rather than future prospects. It's the voice that whispers, "You've come too far to turn back," even when you're marching towards a cliff.

In a crisis negotiation, clinging to a failing strategy because you've invested time and emotional energy in it can have fatal consequences. The ability to objectively assess the situation and pivot — or even walk away entirely — is a critical survival skill. The same is true in the boardroom. Knowing when to fold a losing hand is not a sign of failure; it is an act of profound strategic discipline.

This article will provide clear criteria for recognising and escaping the sunk cost fallacy, empowering you to make the tough but necessary calls that protect your organisation's future.

What is the Sunk Cost Fallacy?

The sunk cost fallacy is our tendency to continue with an endeavour because we have already invested time, money, or effort into it — the "sunk costs" — regardless of whether the current costs outweigh the potential benefits.

It's driven by powerful psychological forces:

• Loss Aversion: We feel the pain of a loss more acutely than the pleasure of an equivalent gain. Abandoning a project makes the loss feel real and undeniable.
• Ego and Reputation: Admitting a project is a failure can feel like a personal failure, especially for the leader who championed it.
• The Desire for Vindication: We hold out hope that with just a little more investment, our initial decision will be proven right.

These emotional drivers cloud our judgment, causing us to focus on what we've already spent rather than what we stand to gain or lose from this point forward.

Three Questions to Break the Spell

When you suspect a project is being kept alive by the sunk cost fallacy, you need a framework to force an objective re-evaluation. The Three Buckets of Control provides a starting point. You cannot control the resources already spent (Bucket 3). You can only control the decisions you make from this moment on (Bucket 1).

To guide that decision, ask yourself and your team these three unflinching questions:

1. "Knowing what we know today, if we hadn't already invested anything, would we greenlight this project?"

This is the most powerful question you can ask. It mentally resets the board to zero. It forces you to evaluate the project based on its current merits, the current market conditions, and the current competitive landscape, completely divorced from the weight of past investment. If the answer is "no," you are almost certainly in the grip of the sunk cost fallacy.

2. "What are the opportunity costs of continuing this project?"

Every pound, every hour, every person allocated to this failing project is a resource that cannot be deployed elsewhere. What is the "next best" initiative that is being starved of resources because of this one? Is clinging to this project preventing you from investing in a genuine game-changer? Framing the decision in terms of opportunity cost — what you are giving up — can make the choice clearer.

3. "What would a successor do?"

Imagine you just took over as CEO and inherited this project. You have no emotional attachment to its history or the decisions that were made. You are only accountable for its future performance. Would you continue to fund it, or would you make the tough call to shut it down and redirect resources? This thought experiment helps to detach your ego from the decision.

A Case Study in Courageous Leadership

I once advised a company that had spent two years and over £10 million developing a new software platform. The project was led by a charismatic and well-respected executive. But the market had changed. A new competitor had emerged with a superior, cheaper solution, and our client's platform was struggling to gain traction.

The executive was trapped. He had publicly championed the project, and his reputation was on the line. The meetings were filled with discussions about "one last push" and "turning the corner."

During a tense board meeting, the CEO stepped in and asked the three questions. The answers were brutal. No, they wouldn't start the project today. Yes, the opportunity cost was massive — it was draining the R&D budget for their core, profitable products. And yes, any new CEO would kill the project immediately.

It was a painful decision, but it was the right one. By asking the right questions, the CEO gave the executive the political cover he needed to walk away. They shut down the project, took the financial write-down, and refocused their resources on strengthening their core business. It was a short-term loss that secured their long-term survival. It was an act of true leadership.

Conclusion: The Freedom to Fold

Escaping the sunk cost fallacy requires courage and discipline. It requires you to separate your ego from the outcome and to value future success more than past investments. It demands that you create a culture where the objective truth is more important than anyone's personal agenda.

Don't let the ghosts of past decisions haunt your future strategy. Use the questions in this article as a diagnostic tool. Regularly assess your major initiatives not by what you have already spent, but by what they promise to deliver. Have the courage to fold a losing hand. It is often the smartest and bravest move you can make.

Facing a tough decision about a failing project?

Making the call to walk away is one of the loneliest moments in leadership. If you need a confidential sounding board to help you navigate a high-stakes decision, let's schedule a private chat.