Two of the most common behavioural traps in personal finance are sunk-cost bias and commitment bias.
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Most financial mistakes are not caused by a lack of information. They are caused by perfectly human behaviour, says Luke Davis-Ferguson.
Two of the most common behavioural traps in personal finance are sunk-cost bias and commitment bias. They quietly influence everyday decisions. From investments and properties to insurance choices and business ventures. And once they take hold, they can keep people stuck in decisions long after those decisions stop making sense.
A powerful step toward better financial outcomes is understanding how these biases work.
The sunk cost trap: when history dictates the future
A sunk cost is money, time or effort that has already been spent and cannot be recovered. Rationally, these past costs should have no bearing on future decisions. The only relevant question should be: What is the best decision from today forward? Yet in practice, we struggle to think that way.
Sunk cost bias occurs when we continue with a course of action primarily because of what we have already invested in it, rather than because it still makes sense.
A common example is an investment that has performed poorly. An investor may refuse to sell because “I’ve already lost so much” or “I’ll sell when it gets back to my original price.” The original purchase price becomes the emotional anchor, even though the market has no memory of it.
Another everyday example is a gym membership. Someone has stopped going months ago yet continues paying the monthly debit order because “I’ve already spent so much this year.” The sunk cost is used to justify further waste.
In financial planning, this often shows up when people have legacy financial products, long held shares or expensive product structures that once made sense but no longer align with their broader goals.
Commitment bias: doubling down to stay consistent
Commitment bias is closely related, but slightly different. While sunk cost bias is about past losses, commitment bias is about protecting our identity. Once we make a decision publicly or tie it to our sense of competence, intelligence or values, changing course feels uncomfortable. Reversing a decision can feel like admitting we were wrong.
For example, an investor may continue contributing to a struggling business venture because they have spent years telling friends and family about its potential. Walking away feels less like a financial decision and more like a personal failure.
In a household finance context, commitment bias shows up when couples persist with an overly expensive property because it was marketed as their “forever home”, even though changing circumstances now make it a heavy financial burden.
Commitment bias keeps people invested in the story of a decision, rather than its current reality.
Why these biases are so powerful
Both biases are driven by loss aversion and emotional discomfort. We feel losses more intensely than gains, and we are deeply uncomfortable with regret. Changing direction forces us to confront the idea that an earlier decision was suboptimal, given new information.
Instead, the mind looks for justifications to stay the course. “It will recover.” “The market is just going through a phase.” “We’ve put too much into this to stop now.” The danger is that these biases encourage good money to chase bad decisions.
Real-world financial examples
Consider a property renovation that keeps running over budget. At some point, the financially sound decision may be to stop and sell. But homeowners often continue pouring money into the project because of what has already been spent. Each additional rand feels like a rescue attempt, even when it worsens the outcome.
Or take retirement planning. A person may stick with an outdated strategy or provider because they have been contributing for years, even when more suitable options exist. The commitment to the past structure overrides a rational assessment of future efficiency, flexibility and cost.
How to counter these biases
The most effective antidote is a shift in framing. Instead of asking, “How much have I already lost or invested?” a better question is, “Knowing what I know today, would I choose this option again?”
Another helpful approach is to separate the decision maker from the decision itself. That is far easier to do with an objective third party involved.
A good financial planner creates deliberate pause in emotionally charged decisions. They re anchor conversations around goals, cash flow, risk, and opportunity cost. Crucially, they are not emotionally invested in the original choice.
This neutral perspective can be the difference between preserving capital and compounding mistakes.
The role of advice in behavioural discipline
Financial planning is not just about products, projections or performance. It is about decision-making under uncertainty. A planner’s real value often shows up not when markets are calm, but when emotions are loud and biases are quietly pushing decisions in the wrong direction.
By helping clients recognise sunk cost thinking and commitment bias when it appears, planners help them redirect resources toward what matters most next, not what once mattered before.
Sometimes, the best financial decision is not to stay loyal to the past, but to give the future a better starting point.
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (Asisa).
For detailed fund information – including unit trust comparison tools, investment calculators and investment industry research – go to FundHub.co.za.
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