What exactly is the "Sunk Cost Fallacy?" The Sunk Cost Fallacy highlights our proclivity to complete an undertaking if we have already put time, effort, or money into it, regardless of whether the present costs exceed the benefits. In other words, we tend to keep going even if doing so is not in our best interest.
Our brains are designed to seek out patterns in what is essentially random data. This is why we see meaning where there is none, and conversely, why we ignore significant evidence that does not fit with our preconceptions. The Sunk Cost Fallacy is one such pattern-seeking brain mechanism that can lead us astray when making decisions that affect our lives.
Consider the case of Scott, who has been offered a job at a company ten times his salary but who remains unemployed despite having spent thousands of dollars on interviews and testing programs. The fact that he has invested so much time and energy into his search effort makes it difficult for him to stop looking for work even though there is no longer any point in doing so.
This story is very common among people who have fallen victim to the Sunk Cost Fallacy. They may have spent years of their life searching for a job they really wanted, only to find themselves stuck in a low-paying career field or without a job entirely.
The sunk cost fallacy occurs when we continue an action because of previous decisions (time, money, resources) rather than a reasonable decision based on what would maximize our benefit at this moment. For example, when we ordered a large lunch and paid for it, we feel obligated to consume all of it. The sunk cost fallacy can also occur when we refuse to accept defeat in a project that is not completed yet.
Here are other examples: if you have spent many hours or dollars developing a product that no one wants, then the sunk cost fallacy would prevent you from giving up now even if it was clear that continuing was unwise. Similarly, if you have invested time and energy into something that is not working, such as a relationship that is going nowhere, then the sunk cost fallacy will keep you from trying another approach.
In business, the sunk cost fallacy can cause problems when we invest significant amounts of time or money into something that turns out to be bad judgment. For example, if you have hired consultants or employees who are not working out, then you should probably stop paying them since this indicates that you are using up your budget on things that do not benefit you.
Finally, the sunk cost fallacy can affect how we deal with loss. If we have invested much time or money in something that has failed, then we cannot simply throw it away without feeling guilty.
When we make a decision based on what we believe to be logical knowledge, we fall victim to the sunk cost fallacy. In truth, we have an undetected bias as a result of the time, money, effort, or attachment we have already committed. Therefore, we should not rely on logic to make decisions.
In business, the sunk cost fallacy can be used to explain why companies will often spend their entire budget on one project instead of distributing the funds across several items. Even if you know from past experience that a certain product will not sell, you are still likely to spend your entire budget on it. This is because people feel compelled to finish what they started. Sunk costs are also responsible for developers continuing to work on projects that they consider valuable even though there is no financial incentive to do so.
The sunk cost fallacy also explains why married couples who have been together for many years will sometimes refuse to divorce even if their marriage is suffering due to incompatibility. The idea that breaking up would cost too much leads them to stay together until they realize they are better off apart.
Finally, the sunk cost fallacy explains why people will often continue fighting with someone they know is wrong for them even when it becomes clear that they will never get back together. They may keep trying because they don't want to admit defeat or because they're just not aware of other options.
Individuals commit the sunk cost fallacy when they continue to engage in an activity or undertaking because they have previously spent resources (time, money, or effort). This fallacy, which is connected to loss aversion and status quo prejudice, can also be interpreted as bias caused by a continuing commitment. Sunk costs are therefore considered a type of bias.
People often refuse to accept that something they have already invested time or money in cannot be changed. Even if new information comes to light or their expectations change, they will usually still stick with their initial plan or decision. The sunk cost fallacy leads individuals to ignore alternative options available at different stages in the past but not present. It prevents them from changing their mind and moving on when new opportunities arise.
In investment decisions, people tend to place greater weight on investments that have already been made than on new opportunities. This is because people want to avoid losing what has already been put forward (i.e., sunk cost effect). Sunk costs affect decision making in several ways. First, it causes people to hold on to failed projects or initiatives because of concern that abandoning them now would result in lost resources. Second, it creates bias against changing course even if evidence suggests this might be necessary. For example, investors may feel compelled to keep pumping money into failing companies rather than taking their losses because to do otherwise would be perceived as giving up on their investment.