Sunk cost fallacy

The sunk cost fallacy is a cognitive bias where individuals make decisions based on previously invested resources (time, money, effort) rather than the present and future value of their decision. This often leads to irrational decision-making as people continue to commit to a course of action due to the costs already incurred, which cannot be recovered.

How it works

The sunk cost fallacy occurs when individuals evaluate their choices based not on the present or future benefits and costs, but on the past investments that are lost regardless of the current decision. This results from the emotional attachment to the resources already spent and the distress associated with loss. This fallacy often compels individuals to follow through with a plan even when it is disadvantageous, justifying poor decisions based on the history of investment rather than current merit.

Examples

Continuing to invest in a failing business because significant funding has already been devoted to it, despite the likelihood of losses.
Persisting with a long movie that is not enjoyable because you have already watched half of it.
Holding onto a stock that is declining in value because you paid a high price for it initially.
Staying in a relationship due to the years already spent, ignoring signs that it is unfulfilling or detrimental.

Consequences

The sunk cost fallacy can result in significant negative outcomes, such as financial loss, wasted time, and emotional distress. It may lead to persistence in failing ventures, reduced personal satisfaction, and inefficient allocation of resources, ultimately impeding personal and professional growth.

Counteracting

Awareness is a key strategy in counteracting the sunk cost fallacy. By recognizing that past investments should not affect current decision-making, individuals can cultivate a mindset focused on future value and potential outcomes instead. Implementing decision-making frameworks that prioritize current and future benefits over past costs, seeking third-party opinions or advice, and setting predefined criteria for abandoning projects can also help in mitigating this bias.

Critiques

Critics argue that the interpretation of what constitutes sunk costs can be subjective and context-dependent, making the practical application of avoiding sunk costs challenging. Additionally, not all decisions influenced by past investments are irrational; sometimes the emotional and learning value associated with commitments does play a rational role in decision-making.

Fields of Impact

Psychology & Social Science

Economics & Finance

Political Science & Public Policy

Also known as

Escalation of commitment

Irrational commitment

Concorde fallacy

Relevant Research

Escalation of Commitment in Individual and Group Decision Making
Barry M. Staw (1981)
Handbook of Behavioral Economics
Throwing good money after bad: Sunk costs, framing, and bailing out.
Hal R. Arkes, Catherine Blumer (1985)
Organizational Behavior and Human Decision Processes

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