The Sunk Cost Fallacy explains our tendency to complete a task after investing time, effort, or money into it, regardless of whether the current costs exceed the benefits.
Where does sunk cost fallacy bias occur?
The sunk cost fallacy occurs when people continue a behavior or undertaking because they have already invested resources (time, money, or effort). This fallacy, which is linked to loss aversion as well as status quo bias, could also be interpreted as bias caused by a long-term commitment.
For example, assume you paid $50 for a concert ticket a few weeks ago. You’re unwell on the day of the concert, and it’s raining outside. You’re aware that the rain will make traffic worse, and that attending the performance puts you in danger of becoming unwell. Why are you likely to opt to attend the concert despite the fact that the disadvantages appear to exceed the benefits?
This is referred to as the sunk cost fallacy. We are more inclined to continue an endeavor if we have already invested in it, whether that investment is monetary or in the effort that we have put into the decision. That frequently entails going against data that indicates it is no longer the best decision, such as illness or weather impacting the event.
Effects on individuals
Sunk costs are costs that have already been incurred but cannot be recovered. In the prior case, whether you attended the event or not, the $50 spent on concert tickets would not be recouped. As a result, it should not be a component in our current decision-making, because using irrecoverable expenses as a basis for making a current option is irrational. If we acted logically, we would consider only future costs and rewards, because regardless of how much we have already invested, we will not receive it back whether or not we follow through on the decision.
The sunk cost fallacy states that we make irrational decisions because we consider factors other than the available options. The fallacy has an impact on many aspects of our lives, resulting in unsatisfactory consequences. These consequences can range from electing to stay with a spouse even if we are unhappy because we have already invested much of our lives with them, to simply spending money restoring an old house even though it would be cheaper to purchase one since we have already put money in it.
Effects on the entire system
The sunk cost fallacy affects more than just everyday decisions like going to a concert. It has also been shown to have an impact on government as well as companies’ decisions.
The Concorde fallacy is a well-known example of the sunk cost fallacy influencing large-scale decisions. The Supersonic Transport Aircraft Committee met in 1956 to study the Concorde, a supersonic airliner. The project, which was anticipated to cost about 100 million dollars, featured French and British engine manufacturers as well as the French and British governments. Long before the project was completed, it was evident that costs were rising and that the plane’s financial benefits, once in service, would not be enough to compensate. The project, nevertheless, persisted. The manufacturers and governments completed the project since they had previously invested large financial resources and devoted a significant amount of time to it. Concorde operated for fewer than 30 years as a result of this waste of millions of dollars.
If governments and large corporations, such as those engaged in the Concorde project, fall prey to cognitive fallacies such as the sunk cost fallacy, it is straightforward to see how significant sums of money, time, and effort are wasted because the sunk costs would never be managed to recover regardless about whether the project was neglected. Because governments frequently use tax-payer funds for projects, their use of the sunk cost fallacy can have a negative impact on all of us.
Why sunk cost fallacy happens?
Because humans are not fully rational decision-makers and are frequently swayed by our emotions, the sunk cost fallacy emerges. We are more prone to feel guilty or regretful if we do not follow through on a decision that we have previously invested in. The sunk cost fallacy is linked to the commitment bias, which occurs when we stick to our previous judgments despite fresh data indicating that they aren’t the best option. We forget to consider that whatever time, effort, or money we already have invested will not be repaid. We end up making judgments based on past expenses rather than current and future costs and benefits, which are the only ones that should properly matter.
What is the importance of sunk cost fallacy?
As the multiple examples in this article demonstrate, the sunk cost fallacy has an impact on many parts of our daily lives, as well as larger decisions with long-term consequences. The sunk cost fallacy implies that humans make irrational judgments that result in inferior outcomes. We are more concerned with our past investments than with our current and future costs and benefits, resulting in actions that are no longer in our best interests. Because we keep investing money, time, and effort in pursuits that we have previously engaged in, the sunk cost fallacy is
a vicious cycle. The more we invest, the more dedicated we feel to continuing the project, and the more resources we are inclined to devote to seeing it through.
What to avoid sunk cost fallacy?
While it is difficult to overcome innate cognitive fallacies, we may try to ensure that we are focusing on the present and future expenses and advantages rather than past commitments if we are aware of the sunk cost fallacy. We should focus on tangible activities rather than the sense of wastefulness or guilt that comes with breaking a previous commitment, as research has shown that when we refrain from making judgments based on our emotions, the sunk cost fallacy’s effects are diminished. However, we find it difficult to disregard our emotions since they have such a strong influence on our decisions. We can instead rely on technology to assist us in making decisions. Information technology systems create reasonable conclusions that are not influenced by previous decisions.