In the realm of argumentation and critical thinking, fallacies serve as subtle traps that can mislead, manipulate, or distort the way we perceive and engage with information. One such cognitive pitfall that frequently clouds our judgment is the sunk cost fallacy, also known as the Concorde Fallacy. This article will shed light on the psychology and origin behind it and how this logical pitfall can be avoided.
Sunk cost fallacy in a nutshell
The sunk cost fallacy is when people keep doing something or spending more on something, just because they’ve already put a lot of time or money into it, even if it’s not a good idea anymore. It’s like continuing to watch a boring film just because you’ve already paid for the ticket, even though you could leave and do something more enjoyable.
Definition: The Sunk Cost Fallacy
The sunk cost fallacy is a cognitive bias or error in decision-making, where individuals or organizations continue to invest resources (such as time, money, or effort) into a project, endeavour , or decision based on the number of resources already expended. It’s a logical fallacy that describes the phenomenon of sticking with a losing or failing venture because you’ve already invested resources that you can’t get back when it’s clear that the additional investment is unlikely to happen. In essence, it’s making choices influenced by past costs that are irrecoverable (“sunk”), rather than evaluating the current costs and circumstances and potential future costs and benefits objectively. Thus, it is an irrational decision.
Example
Imagine you’re a graduate student on the cusp of contemplating your bachelor’s thesis, a monumental effort spanning years of research and academic writing. After countless revisions, meetings with your advisor, and many late nights, you’re finally ready to print the final version to submit. The day before submission, you discover a typographical error. It’s minor, yet the thought of reprinting the entire thesis, spending precious time and resources, nags at you. And this nagging has a name: sunk cost fallacy.
Now, you have two options for this inconvenience:
- Ignore the mistake and submit the thesis as-is, reasoning that you’ve already spent a specific amount of money on printing, and it would be a waste of money to reprint it.
- Spend the additional money to reprint and rebind the thesis, ensuring that your submission is error-free.
The money, time, and effort you have already spent on researching and writing your thesis are considered sunk costs, as they cannot be recovered whether you print the thesis or not. Ideally, your decision to print the thesis or not should be based on all the hard work you’ve done for it, not on the money, time, or effort you’ve spent on it.
If your answer is handing in your thesis regardless of the spelling mistake, you just experienced the sunk cost fallacy. You would be letting past irrecoverable costs influence a future decision. The correct approach would be to evaluate the situation based only on the future benefits and costs. If submitting an error-free thesis has enough future value (like a better grade, better impression, or peace of mind), then it would be wise to reprint, regardless of the money already spent.
Both answers are possible. However, if you hand in your thesis, nonetheless, the time and effort you already invested in researching and writing your thesis are considered as “sunk costs”, that are irrecoverable.
The sunk cost fallacy hinges on the idea that you need to stick with your project to get your money’s worth because you’ve already incurred costs. Eventually, each one of us falls into this error. Here are a few reasons:
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Loss aversion
It feels safer sticking with something familiar rather than trying something unknown with potentially bigger risks. People tend to prioritize avoiding losses over seeking potential gains. -
Commitment bias
Humans tend to stick with previous behaviors or beliefs. Every so often, it prevents us from acting in our own best interest.
A sunk cost refers to money, time, or effort that has already been spent and cannot be recovered. These costs have already occurred, and they should not impact future decision-making. The idea is that, since sunk costs are in the past and cannot be changed, they should not be considered when making future decisions.
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Origin of the sunk cost fallacy
The sunk cost fallacy is typically attributed to the psychologists Hal Arkes and Catherine Blumer, who conducted a seminal study on the topic in 1985. Their research paper, titled “The Psychology of Sunk Cost,” published in the Journal of Behavioural Decision-Making, is considered a foundational work in understanding this cognitive bias.
In their study, Arkes and Blumer investigated how individuals tend to irrationally continue investing in projects or decisions when they have already incurred sunk costs, even when those investments are unlikely to lead to positive outcomes. They conducted a series of experiments to demonstrate this phenomenon, including scenarios involving hypothetical ticket purchases and real-world examples from business and personal finance.
Arkes and Blumer’s work shed light on the psychological mechanisms behind the sunk cost fallacy, showing that people typically let emotions, such as regret over past investments, influence their decision-making rather than focusing on the rational assessment of current circumstances.
Their research has since been foundational in the study of behavioural economics and decision-making processes, contributing to a more profound understanding of why individuals and organizations sometimes make suboptimal choices when facing sunk costs.
Psychology behind the sunk cost fallacy
The psychology behind the sunk cost fallacy is rooted in several cognitive and emotional factors that influence human decision-making. Understanding these elements can help shed light on why individuals often succumb to this cognitive bias:
Loss aversion
People tend to prefer avoiding losses rather than acquiring equivalent gains. The idea of “wasting” resources or investments can be emotionally distressing. When people have already invested money, time, or effort into something, they may view abandoning it as a loss, which can trigger a strong emotional response.
Commitment bias
Once individuals have made a commitment or investment, they often feel a psychological need to justify their past decisions. This commitment bias can make people more inclined to continue investing in a project, relationship, or endeavour even when evidence suggests it’s not the best course of action.
Cognitive dissonance
People tend to rationalize their past decisions to protect their self-esteem and maintain a sense of consistency. This can lead to the belief that if they’ve already invested resources, they should continue to do so in the hopes of eventually reaping rewards.
Examples
These examples demonstrate how the sunk cost fallacy can lead individuals and organizations to make irrational decisions by focusing on past investments rather than objectively assessing the current and future costs and benefits of their choices. It’s important to recognise this cognitive bias and make day-to-day decisions based on the present and future rather than past investments that cannot be recovered. Below, you will find real-life examples of the sunk cost fallacy:
Financial investments
Example 1
Imagine you’ve invested a significant amount of money in stock, and the stock’s value has been steadily declining. Instead of cutting your losses and selling the stock, you keep holding on to it, hoping it will rebound. You continue to invest more money, thinking that you can recoup your initial investment, even though it’s clear that the stock is not performing well. You won’t get the invested money back.
Education
Example 2
Suppose you’ve been pursuing a degree for several years and have already invested a substantial amount of time and money in it. However, you’ve come to realise that you’re no longer interested in the field or that job prospects in that area are limited. Despite this, you decide to complete the degree simply because of the investments you’ve already made.
Gym membership
Example 3
Imagine you have paid for a year-long gym membership, but as time goes on, you find it difficult to make time for the gym. Instead of cancelling it, you continue paying, thinking, “I’ve already invested, so I should keep going to make it worth the money.” In this case, the past expenses drive future decisions, even though there is no longer the need for it.
Tips to overcome the sunk cost fallacy
Overcoming cognitive fallacies involves resisting the natural human tendency to want to recoup investments. This is what makes the sunk cost fallacy challenging. However, it’s essential for making rational decisions. Here are some strategies to help you overcome the sunk cost fallacy and make advantageous decisions:
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Consider your “opportunity costs”
Think about what else you could have achieved with your resources. -
Recognize and acknowledge it
The first step in overcoming the sunk cost fallacy is to recognise when it’s happening. -
Assess the current situation
Evaluate the project/investment. Is it still a rational choice? -
Set clear decision criteria
For a clear decision, it is crucial to establish specific criteria for decision-making. -
Avoid emotional investment
As soon as you feel emotionally invested in a project, you might lose sight of what is actually going on. Seek advice from people who are not emotionally invested in the project for a clearer vision. -
Pay attention to reasoning
If you’re still thinking about past investments rather than future costs or opportunities, you should evaluate your investment to figure out, if it is still worthwhile holding on to it.
FAQs
The sunk cost fallacy is a cognitive bias in day-to-day decision-making. In this fallacy, individuals or organizations continue to invest time, money, or effort in a project or investment they have made, even when those investments are unlikely to be recouped. It generally leads to illogical choices.
Sunk costs are resources (e.g., time, money, effort) that have already been expended and cannot be recovered in the sunk cost fallacy. They are “sunk” because they are in the past and should not influence future decisions.
Imagine you’ve bought concert tickets. On the day of the event, you feel ill, and you should rather stay at home. Despite your illness, you decide to attend, nonetheless, because you’ve already paid for the tickets. You would rather not waste the money, that you’ve already spent, than take care of your health.
This real-life example shows that individuals mostly want to “get their money’s worth”.
There are several strategies to overcome the sunk cost fallacy:
- Consider your opportunity costs
- Assess the current situation
- Set clear decision criteria
- Avoid emotional investment
Yes, this fallacy can apply to relationships as well. In the context of relationships, the sunk cost fallacy occurs when individuals continue investing time and emotional energy in a relationship that is no longer fulfilling or healthy, simply because they have already invested a significant amount of time, effort, or emotional commitment.
