Sunk Cost Fallacy: Why Keep Paying for Things You Don't Use

You probably have at least one expense you keep paying for even though you barely use it - a gym membership, a streaming bundle, a premium card, or an overpriced apartment you “can’t” leave. You know it doesn’t make sense, but stopping feels worse than continuing. That tension is the sunk cost fallacy in action.

The sunk cost fallacy is your brain’s tendency to factor past, unrecoverable costs into future decisions[1] , even though rationally only future costs and benefits should matter. When left unchecked, this bias quietly locks you into subscriptions, debts, and lifestyles that slow wealth building and keep money stress high.

What is a sunk cost?

A sunk cost is any money, time, or effort you’ve already spent that you cannot get back [2] .

The joining fee you paid for a gym last year.
The tens of hours and thousands of dollars you invested in a course you abandoned.
The renovation money sunk into a house you now want to sell.

From a purely economic perspective, the correct rule is simple: ignore sunk costs. Decisions should depend only on whether continuing will create more value than your next‑best alternative from today forward.But that isn’t how human psychology works. Once you’ve invested in something, three forces kick in:

Loss aversion – you hate the idea of “locking in” a loss by walking away. [3]
Ego and identity – quitting feels like admitting you were wrong or “wasted” money.
Social image – you worry about what others will think if you downgrade, cancel, or walk away.

Together, they push you to keep paying for things that clearly no longer serve you.

Everyday sunk‑cost traps

Sunk‑cost thinking is everywhere in modern money life.

Unused subscriptions and memberships
- Gym contracts, digital tools, streaming bundles, premium apps, and online communities you rarely use. Cancelling would save money, but your brain focuses on “I’ve already paid so much” instead of “Will this be worth anything in the next month?”.
Overbuilt lifestyles
- Upgraded apartments, luxury cars, or private schools that made sense when you felt flush, but now strain cash flow. You tell yourself, “We’ve already spent so much on this place/car/school - moving or selling now would waste all of that.”
Careers and projects
- Staying in a career path or business that no longer fits because “I’ve already put 10 years into this,” even when a pivot would improve both finances and wellbeing over the next decade.

The more you’ve invested, the harder it becomes to make a clean decision based only on future value. Emotionally, walking away feels like taking a loss, even when you are actually cutting future losses. [4]

A Toronto family of four: when fixed costs turn into a trap

Imagine a family of four in Toronto. Both parents work full‑time and together earn what would be considered strong, above‑median incomes.

On paper, they should be thriving, but look at the structure of their spending:

A large share of each paycheque disappears into combined federal and provincial income taxes, CPP/EI, and payroll deductions.
Housing costs - mortgage or high Toronto rent - absorb a huge monthly chunk, layered with property tax, utilities, and insurance.
Childcare, transit or car payments, groceries, and rising everyday costs consume most of what’s left.

Years ago, they stretched to buy a bigger home in a “better” neighbourhood. It felt like the right move, and they’ve since poured money into renovations and furnishings. Now the mortgage feels heavy, property taxes are climbing, and they’re not investing nearly as much as they planned.

Rationally, a smaller home or different neighbourhood might free up thousands per month for investments, RESP contributions, and emergency savings. But sunk‑cost logic whispers[5]:

“We’ve already put so much into this place.”
“If we sell now, we’ll ‘lose’ the renovation money we just spent.”
“What will friends and family think if we ‘downgrade’?”

So they stay, even as financial stress rises and long‑term goals slip farther away.

A Vancouver dual‑income couple: lifestyle creep and pride

Now picture a couple in Vancouver, both earning roughly median professional incomes for the city. They upgraded to a downtown condo during a strong market and leased a higher‑end car partly because the parking spot came with the unit.

Today:

Housing eats a large portion of take‑home pay once mortgage, strata fees, and property tax are included.
After taxes, housing, car payments, and general cost of living, very little remains to invest.

On paper, downsizing or moving slightly further out could dramatically improve their savings rate. But sunk‑cost and identity dynamics make that almost unthinkable:

“We can’t move; we’ve already spent so much on closing costs and furnishing this place.”
“Selling the car now would lock in a loss when we just signed the lease.”
“If we move out of downtown, it will feel like we’re going backwards.[6]”

What makes this worse is that these decisions rarely get revisited systematically. They just persist in the background, quietly siphoning cash flow that could have gone toward financial independence.

Why the brain hates walking away

Three psychological mechanisms make exiting commitments feel worse than staying, even when staying is clearly costly. [7]

**Loss aversion
**Losses loom larger than gains: giving up a status symbol, writing off renovation money, or canceling a membership feels like losing part of your identity and past investment, even when future benefits are minimal. [8]
Cognitive dissonance and ego protection [9**]
**Admitting “this wasn’t worth it” conflicts with your self‑image as a smart, capable adult. To avoid that discomfort, the brain rationalizes continued spending: “We’ll use it more next month,” “The market will turn around,” or “The kids need this.”
**Social comparison
**Moving to a smaller home, driving a cheaper car, or dropping certain services can feel like falling behind peers, even when it dramatically improves your financial trajectory. The fear of perceived status loss often outweighs the relief of lower expenses.

These forces combine into a powerful status quo bias: better to stick with what you have - even if it hurts - than to face the emotional cost of change. [10]

A practical framework to escape sunk‑cost traps

Escaping the sunk cost fallacy doesn’t require ruthless minimalism or sudden austerity. It does require changing how you evaluate decisions. [11]

1. The Future‑Value Test

For any recurring or big‑ticket expense, ask:

“If I didn’t already have this today, would I choose to buy or commit to it at this price, given my current goals?”

If the honest answer is no, that’s your signal the only thing keeping you there is sunk‑cost thinking.

Use this test on:

Housing choices (rent vs. own, neighbourhood, size).
Cars and leases.
Private schools, daycare options, and activities.
Gym memberships, software subscriptions, and other recurring charges.

2. Clean‑Slate Budgeting

Once or twice a year, rebuild your budget from scratch instead of tweaking last year’s version.

Start with a blank page.
Add only the expenses you would actively choose again today.
Everything else goes on a “review” list to downgrade, negotiate, or cancel.

This prevents legacy commitments from coasting forward just because they’re already in the spreadsheet.

3. Decision Deadlines for Big Fixed Costs

For large commitments like housing, cars, or school choices, set explicit review points.

Example: “We will re-evaluate our housing choice every three years and ask whether it still fits our financial and lifestyle goals.”
At the review, apply the Future‑Value Test and scenario modelling (What happens if we downgrade? What if we stay and invest less?).

Deadlines keep you from drifting for a decade in an ill‑fitting financial setup.

4. Tiny Exit Experiments

If a full change feels too intimidating, use experiments.

Try a smaller apartment for 12 months with a clear plan to reassess.
Downgrade to a cheaper car at the next renewal instead of breaking your lease immediately.
Pause, rather than cancel, certain subscriptions and track whether you really miss them.

Experiments give your brain psychological safety: you’re “trying a test,” not permanently admitting defeat.

How PsyFi helps you break sunk‑cost patterns

Sunk‑cost decisions usually operate in the background - on autopilot. PsyFi is designed to drag them into the light and make better choices easier.

Recurring‑expense detection: PsyFi surfaces subscriptions, memberships, and regular charges you may have forgotten about, highlighting how much they cost per year and how that compares to your goals.
Future‑value prompts: When the app flags a recurring charge, it asks Future‑Value Test questions: “If you didn’t already pay for this, would you buy it today?” and shows the long‑term impact of cancelling versus keeping it.
Scenario views for big fixed costs: For expenses like housing, cars, or schooling, PsyFi can simulate what happens to your net worth if you keep your current setup versus scaling down and investing the difference.
Behavioral nudges: Timely reminders during renewal periods, rent‑increase notices, or large annual bills encourage you to review, not auto‑renew.

By combining detection, clear visualizations, and behavioral nudges, PsyFi turns sunk‑cost decisions from invisible defaults into conscious choices. You keep what genuinely serves you and free up cash for what actually moves the needle - debt reduction, emergency buffers, and long‑term investing.