Sunk Cost Fallacy
What is it?
The sunk cost fallacy is a cognitive bias where individuals continue investing in a project or decision based on the resources already invested, even when continuing to invest is no longer logical or rational.
The Sunk Cost Fallacy is a cognitive bias where people continue to invest time, money, or effort into a decision or project based on the amount they have already invested, rather than evaluating the current and future value of their investment. People tend to have a hard time letting go of their past investments, even if it's no longer the best course of action.
Here are two simple examples to help you understand the Sunk Cost Fallacy:
Movie tickets: Imagine you bought a non-refundable movie ticket for $10. Halfway through the movie, you realize it's terrible, and you're not enjoying it at all. However, you decide to stay and watch the rest of the movie because you already paid for the ticket. This is an example of the Sunk Cost Fallacy, as you're continuing to invest time in something that isn't providing value simply because you've already spent money on it.
Home renovation project: Suppose you started a home renovation project that you initially expected to cost $5,000. As the project progresses, unexpected issues arise, and the costs keep increasing. Even though the project has already cost you $15,000 and the final result might not be worth the extra expense, you decide to keep pouring money into it because you've already spent so much. This is an example of the Sunk Cost Fallacy, as you continue to invest in a project based on past expenditures rather than reevaluating its current worth and potential benefits.
The Sunk Cost Fallacy can lead to irrational decision-making and an inefficient allocation of resources. To avoid this fallacy, it's important to focus on the current and future value of investments and be willing to let go of past investments if they no longer serve your best interests.
The Sunk Cost Fallacy, also known as the sunk cost effect or escalation of commitment, is a cognitive bias and decision-making phenomenon extensively studied in the fields of economics, psychology, and organizational behavior. It refers to the tendency for individuals and organizations to persist with an endeavor or investment based on the amount of resources already invested, rather than evaluating the current and future value of the investment.
The Sunk Cost Fallacy is related to several other psychological principles, cognitive biases, and scientific fields, including:
Loss aversion: A concept in behavioral economics, introduced by Daniel Kahneman and Amos Tversky, which posits that people experience stronger negative emotions from losses than positive emotions from equivalent gains. Loss aversion can contribute to the Sunk Cost Fallacy, as individuals may be more concerned with avoiding the perceived loss associated with abandoning a project or decision, despite evidence that further investment is unwarranted.
Cognitive dissonance: A psychological theory developed by Leon Festinger, which suggests that individuals experience psychological discomfort when they hold conflicting beliefs or attitudes, and are motivated to reduce this discomfort by aligning their beliefs or attitudes. The Sunk Cost Fallacy can be linked to cognitive dissonance, as individuals may persist with a failing investment to maintain consistency between their past and present decisions, and to justify their initial commitment.
Escalation of commitment: A phenomenon in organizational behavior where decision-makers become increasingly committed to a course of action, despite evidence of its ineffectiveness or negative consequences. The Sunk Cost Fallacy is a key factor contributing to escalation of commitment, as individuals may feel compelled to justify and protect their prior investments, even at the expense of rational decision-making.
Understanding the Sunk Cost Fallacy and its underlying psychological mechanisms can help individuals and organizations make more informed decisions and avoid the pitfalls of escalating commitment to failing investments.
References
- Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140.
- Staw, B. M. (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16(1), 27-44.
- Festinger, L. (1957). A theory of cognitive dissonance. Stanford University Press.
- Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.
