A sunk cost in economics is a past investment that cannot be recovered.
Sunk-cost fallacy is the misconception that the time, effort or money already invested in a project will be worth more in the future. This misconception hinders our ability to make rational decisions.
The Sunk Cost Fallacy. The Misconception: You make rational decisions based on the future value of objects, investments and experiences.
How often do we fall prey to this fallacy? A lot. It’s bound up in lots of small actions. Take these examples:
You order too much food at at restaurant but continue eating even after you’re full ‘to get your money’s worth’.
You’ve got tickets to a gig, fall sick but go along anyways because y0u’ve already paid for the tickets.
You start to watch a film and fifteen minutes in you realise it’s the actual worst but you keep watching regardless because you’re ‘committed’.
These are all sunk cost fallacy classics. I know I’ve been there plenty. The challenge is that these choices are based on our perception of loss.
As emotional humans we’re loss averse. Loss hurts. We don’t like it.
And the sunk cost fallacy leans right in to our loss aversion, causing us to make choices that are irrational and short sighted. The more we invest into these irretrievable situations, the greater the escalation of the commitment.
Concorde was a very famous, very expensive example. So much so that it has it’s own name, ‘the concorde fallacy’, is another way of explaining this concept.
Regardless of the amount invested, the loss needs must be experienced at some point. The sunk cost fallacy is merely a distraction from the inevitable: the pain of loss.