Sunk cost fallacy: "we should have"

The trap strikes everywhere, and always for the same reasons. It strikes the restaurateur, the retailer, a law firm, the insurer, the professional firm of every size and every sector. Anywhere a reputation can be threatened by a single fault, anywhere a leader can convince themselves that acknowledging the error would cost more than denying it, the same scenario plays out.

To illustrate it, we have chosen the example of a restaurant. Not because it is unique, but precisely because it is universal: the mechanism observed there reproduces itself, with minor variations, in any business caught in the same machinery.

And since this publication deals with law and institutional dynamics, the reader will draw the parallel themselves as the article unfolds.

Imagine a Michelin-starred restaurant. An established institution, recommended in culinary magazines, cited as a benchmark in its segment. The owners have devoted years of work to it and built a reputation few establishments achieve.

One evening, a client falls seriously ill after a meal. The internal investigation reveals an isolated kitchen error — an improperly stored product, a momentary lapse, a single incident in an operation that handles thousands per year.

The client returns a few days later. They do not ask for much: a symbolic compensation, the acknowledgement that something went wrong, a gesture.

The restaurant refuses.

It is here, at this precise moment, that everything tips. Not later, not in the months that follow. There, in the refusal of a simple, human-scale repair.

So why, then, does the restaurant refuse?

The initial refusal almost always rests on the same assessment: the client is judged to be a nuisance, their case inconsequential, their persistence presumed to be limited. It is a calculation of pride, not of law. And it ignores one fundamental thing: you never know who you are dealing with.

The dissatisfied client posts a review. Then another. They contact a journalist. They file a lawsuit. Along the way, they discover that they have more resources, more patience, or a wider network than the restaurant had assumed.

The restaurant’s insurer then enters the scene. And it is here that the mechanism grows complex in ways that few owners anticipate.

In our example, the insurer makes the same decision as its client: defend rather than settle. It backs the narrative of the troublesome plaintiff. It refuses to negotiate. It digs in.

It is worth pausing here on a crucial detail. At the outset, the owners of the restaurant were not the source of the fault. The negligence came from a kitchen employee, on a given evening, in circumstances they had not directly controlled. They could legitimately have publicly acknowledged the error, compensated the client, dismissed the responsible party, and moved on. But by choosing to protect the establishment rather than to take responsibility for the incident, they shifted the very nature of their liability. The initial fault belonged to someone else. The cover-up, however, became theirs. This shift, almost imperceptible at the moment it happens, is one of the most universal mechanisms of the sunk cost fallacy: one enters the trap trying to protect someone else, and emerges from it months later realizing that one has become the target oneself.

Behind the insurer looms the reinsurer — the insurer’s insurer. When this party becomes aware of the file, they discover that the initial risk assessment was likely misrepresented to them. They now have an interest of their own in the facade holding, because its collapse would expose their own negligence.

And above all of this, the health inspector who had passed through the month before the incident also discovers the file belatedly. Their report at the time judged the sanitary conditions to be compliant. To reveal now the full extent of the problem would mean putting their own diligence into question, and above them, that of the supervising ministry. The administration chooses prudent silence. It lets the file run its course without intervening, hoping it will fade on its own. This same mechanism reproduces itself identically in other sectors when a professional order, an oversight body, or a regulatory authority belatedly discovers that a file it should have caught has slipped through.

While this underground machinery operates, the establishment itself is changing. Quietly at first, then openly.

The renowned chefs leave one after another. No professional of standing accepts to join an establishment whose reputation has become toxic in the trade. The restaurant hires second-tier candidates, then third-tier. Soon, it is junior graduates without experience who run a kitchen tasked with executing a Michelin-level menu.

The menu simplifies. Operations rationalize. The fare drifts toward the quick and the efficient, but prices remain those of refined cuisine — because the lease in the prime neighbourhood, the payroll, the equipment, all the costs of a great house must still be covered.

Premium suppliers no longer deliver without payment in cash. Sanitary inspections come closer together. Civil liability premiums rise. Good employees look elsewhere. The entire operational fabric that made the establishment’s quality unravels, slowly, without anyone really deciding.

At the start of the crisis, when the chef responsible for the incident left, the owners told themselves that a good public-relations campaign would suffice to rekindle the engine. A redesigned menu, a few magazine ads, a stronger presence on social media. The calculation seemed reasonable. Except they soon noticed a counter-intuitive effect: every time a search led a potential customer to their advertising, Google’s algorithm pulled up alongside it the articles, the negative reviews, the criticism accumulated since the incident. The more they paid to be seen, the more the bad reputation resurfaced. Conventional advertising was abandoned.

That left only one lever: to seek out clientele that would not run the search. A younger, more mobile audience that does not read magazines and does not consult Google before walking into a restaurant. The establishment began producing TikTok videos, partnering with content creators, steering its menu toward more visual and quicker dishes. The Michelin-starred restaurant of yesterday became, almost without anyone formulating it that way, a different establishment — serving a different cuisine, to a different clientele, in the same expensive setting as before.

The owners, meanwhile, inject their personal savings. Then their retirement funds. Then they borrow against their home. Each month, they convince themselves that the next month will be the turning point. Each month, they add to the investment already lost, because to give up now would mean acknowledging that everything they have injected since the start of the crisis was in vain.

This is the heart of the sunk cost fallacy. And it is exactly what happens, in other forms, in a professional firm that locks itself into the defence of an indefensible file, in a retail business that clings to a location that ruins it, in a company that maintains a brand the market has already rejected.

At a certain stage, closing becomes nearly impossible. And it is here that the situation takes on its truly dramatic dimension.

There are still customers in the dining room. Several have already paid in advance for banquets, weddings, private events. The restaurant accepted those sums knowing the promised quality would not be delivered.

And closing, at this stage, is no longer a simple business decision. Closure would publicly and instantly acknowledge everything the defensive machinery has spent months or years denying. It would expose the insurer, the reinsurer, and the public administration that protected the facade.

Each of these actors now has an interest in seeing the establishment continue to operate, even poorly. Its very survival has become the last bulwark against the collective revelation of accumulated faults.

The paradox is striking. Several of these actors exist, as their primary purpose, to protect the customers themselves — the health inspector ensures that no one falls ill from eating at the restaurant; the ministry of health oversees the entire system precisely to prevent this kind of incident. Yet by choosing silence to protect themselves, they keep open the doors of an establishment that now serves new customers each day in degraded conditions. Every guest who walks through the door tonight, who sits down, who orders in good faith, has become a potential victim — not only of the restaurateur, but of an entire system that chose not to reveal what it knew. The protectors no longer protect. They accept that new victims be added to the old, because the revelation of the old would expose them.

The restaurateur has become, without choosing it, the water-carrier of a system that sacrifices them in silence.

Here is the test every leader in crisis — whatever the sector — should impose on themselves, in silence, honestly.

If the answer is no, then continuing to own it amounts, economically, to buying it again every day. The past is past. The money invested will not return. The only question that matters is what one chooses to do, now, with what one has, now.

But this question is one almost no one asks in time. It is asked afterward. It is asked the day after closing, while taking inventory of the warning signs one should have seen. It is asked in silence, while watching the lease come to an end.

And it is there, almost always, that the words “we should have” arrive.

All testimonies converge on the same phrase. Very rarely does someone say “I gave up too soon.” Almost always, it is the opposite.

There is, in this entire mechanism, something that resembles tragedy in the classical sense. Each actor, in protecting what they believed they had to protect, made worse precisely what they were trying to avoid.

The restaurateur lost their reputation by trying to save it. The insurer lost more than it would ever have paid in settlement. The reinsurer saw its exposure grow rather than diminish. The public institution that wished to protect its facade ended up watching its credibility erode as the affair became public.

All of this because, at the origin, someone refused to negotiate the price of a meal.

Most people only realize this at the moment when it is too late to turn back.

This lesson holds for the restaurant of our example. It holds equally for the professional firm, the family business, the insurance agency, the clinic, the accounting practice. Wherever trust is central, the mechanism is the same. And everywhere, the way out is the same: recognize early, repair simply, take responsibility for what must be taken responsibility for.

Strategic transparency — not public confession, but the calm, factual mastery of one’s own narrative — remains the most underused tool in crisis management. And the most powerful.