Updated: Sep 28, 2021
In short, the Sunk Cost Fallacy is a broad category of error in which irretrievable past expenses distort your reasoning about the future. "Throwing good money after bad" is a metaphorical description of this type of mistake. It's possible to battle the Sunk Cost Fallacy; try our free mini-course on the subject to learn how.
Here's the long version:
"Sunk cost" is a term that comes from economics — it refers to past expenses that you can't get back. For instance, suppose you want to build a shed, so you buy some nails and planks of wood. Once you start hammering the nails into the planks, the money you spent on them becomes a "sunk cost." You can't return used nails or planks, and so can't get your money back, even if you don't finish the shed or find yourself unhappy with the results.
The Sunk Cost Fallacy, then, is a term for the way that these sunk costs can distort your reasoning about the future. Imagine that while you're building that shed, you realize that it's going to come out leaky, ugly, and too fragile to actually use — but you decide to finish it anyway, since you already spent a bunch of money on nails and planks. Rationally, the sensible thing to do would be to abandon the project, since there's no use in investing even more time building a shed that you've already concluded will be worthless, but it can be hard to keep that in mind when you're already deep into the project.
This type of error is deceptively common — it can be found in all areas of life, from business and homemaking decisions to personal projects and romance. It can even affect those who plan major corporate development and government infrastructure products, leading to massive wastes of resources that affect everybody. Unchecked, the Sunk Cost Fallacy can trap you in failing ventures, toxic relationships, and useless routines that waste your time and resources. That's where the term "throwing good money after bad" comes from; it describes how the Sunk Cost Fallacy can convince you to keep dumping money into a project you know is failing.
Fortunately, there are ways to catch yourself falling for the Sunk Cost Fallacy, and to correct for it. Try our free, extensive mini-course on the Sunk Cost Fallacy to learn some vital techniques for keeping your good money in your pocket.
Some other everyday examples of the Sunk Cost Fallacy in action:
Finishing a distasteful meal at a restaurant because you already paid for it.
Sticking with a graduate program for a subject you've discovered that you hate, because you've already invested a couple of years in it.
Carrying on a loveless relationship strictly because you've been together for a long time.
Continuing to defend a discredited idea because you feel that your reputation is at stake.