Sunk Cost Fallacy

People continue bad plans due to past investment.

"You can't make decisions based on what you have already invested. Only the future matters."

Daniel Kahneman

In Agile organizations, the Sunk Cost Fallacy surfaces when strategic decisions are sustained, not because they deliver value, but because resources have already been committed. It's the corporate equivalent of saying, "we've come this far, we can't stop now." Budgets, headcount, milestones, and executive promises all become barriers to change, even when evidence calls for a pivot.

At odds with Agile principles of responding to change and maximizing the amount of work not done, the Sunk Cost Fallacy fuels inertia at scale. The organization moves, but not necessarily in the right direction.

Impact on Agile Organizations

Sunk cost bias at the organizational level has wide-ranging effects:

  • Portfolio Drag:
    • Initiatives remain funded long after their assumptions have expired, blocking space for emergent opportunities.
  • Executive Entrenchment:
    • Leaders avoid walking back prior decisions for fear of appearing inconsistent, even when change is warranted.
  • Governance Gridlock:
    • Stage-gate or annual planning models resist termination of failing projects, pushing teams to "make it work" regardless of outcome.
  • Cultural Rigidity:
    • Delivery becomes performative, teams demonstrate progress on bad bets rather than deliver meaningful value.

These patterns protect sunk effort at the cost of adaptability and learning.

Scenario

An enterprise financial services company launches a digital transformation program focused on rebuilding their legacy platform. The three-year roadmap is approved with a multi-million dollar budget and significant executive visibility.

Two years in, user adoption is low, newer fintech competitors have shifted the market landscape, and internal feedback suggests the new platform isn't aligned with modern customer expectations. Despite this, the initiative continues.

Mid-level leaders fear proposing alternatives. Executive sponsors defend the strategy to protect political capital. Teams are told to "finish strong."

The transformation becomes a monument to past decisions, rather than a platform for the future.

Ways to Mitigate Sunk Cost Fallacy in Agile Organizations:
  1. Fund Options, Not Outcomes:
    • Adopt Lean Portfolio Management and incremental funding.
    • Approve discovery and delivery in stages, allowing for stop/pivot decisions based on real data.
  2. Decouple Status from Continuation:
    • Redefine success metrics. Reward leaders for surfacing early signs of failure, not just pushing initiatives to completion.
  3. Strengthen Feedback Loops at All Levels:
    • Encourage continuous discovery and real-time metrics.
    • Allow product and technology leaders to challenge plans using current insight, not historical investment.
  4. Build Cultural Safety Around Change:
    • Normalize the idea that ending the wrong work is delivering value.
    • Make Retrospectives part of portfolio reviews, not just team ceremonies.
  5. Diversify Strategic Bets:
      Apply portfolio thinking: distribute risk across multiple validated learning efforts rather than anchoring to a single high-cost initiative.
Conclusion:

At the organizational level, the Sunk Cost Fallacy becomes structural. Agile ways of working can't thrive if governance, funding, and leadership behaviors reinforce commitment over curiosity. Agile organizations must build systems that reward learning, enable course correction, and detach prestige from persistence. To be truly Agile, we must be willing to walk away.

Key Takeaways

  • Sunk cost fallacy is amplified by budgets, hierarchy, and planning inertia.
  • Agility requires letting go of work that no longer serves its purpose - regardless of past investment.
  • Governance, funding, and culture must support options thinking and adaptive decision-making.
  • Psychological safety must extend beyond teams to executives and sponsors.

Summary

Agile transformation is not just about team-level agility, it demands organizational structures that embrace change over sunk investment. When organizations hold onto initiatives out of fear, pride, or cost history, they trade adaptability for illusion. True agility requires courage to reassess, humility to redirect, and systems that make stopping a virtue, not a failure.