What is sunk cost fallacy?

Short Answer

Sunk cost fallacy is our tendency to continue investing in something because we've already invested time, money, or effort, even when continuing is not the best decision.

Detailed Explanation

Background

Sunk cost fallacy affects many of our decisions, from relationships to careers to financial investments. The term "sunk cost" refers to resources we've already spent that we can't recover—like money spent on a non-refundable ticket or time invested in a project. Logically, these past investments shouldn't influence our future decisions, but emotionally, they often do. Understanding How do cognitive biases affect decision making? reveals how sunk cost fallacy contributes to poor decisions.

This bias causes us to throw good money after bad, stay in unhealthy relationships, or continue with failing projects simply because we've already invested in them. Understanding sunk cost fallacy helps us make more rational decisions by focusing on future outcomes rather than past investments. It's particularly important in business, personal finance, and life choices where continuing a bad path can lead to greater losses. This bias is related to Why do people resist change?, as both involve difficulty letting go of past investments or commitments.

Scientific Explanation

Sunk cost fallacy occurs due to several psychological factors:

1. Loss aversion: We feel the pain of losses more strongly than the pleasure of gains, making us reluctant to "waste" what we've already invested.

2. Commitment consistency: We want to appear consistent with our past decisions, so we continue investing to justify our initial choice.

3. Emotional attachment: Past investments create emotional attachment, making it harder to let go even when rationally we should.

4. Effort justification: The more effort we've put into something, the more valuable we perceive it, regardless of its actual worth.

5. Future regret avoidance: We fear regretting our past investment if we stop now, even though continuing might lead to worse outcomes.

Real Examples

• A person continues watching a bad movie because they've already paid for the ticket and spent 30 minutes watching it.

• Someone stays in a toxic relationship because they've invested years in it, even though they're unhappy.

• A company continues funding a failing project because they've already spent millions on it, rather than cutting their losses.

• A student continues pursuing a degree they don't enjoy because they've already completed two years, even though switching majors would be better.

• A person keeps going to a gym they don't like because they paid for an annual membership, even though they never go.

Practical Application

How to Apply

To avoid sunk cost fallacy:

1. Focus on future outcomes: When making decisions, consider only future costs and benefits, not past investments.

2. Ask "Would I start this today?": If you wouldn't start something today with what you know now, consider whether you should continue.

3. Separate past and future: Recognize that past investments are gone and can't be recovered, so they shouldn't influence future decisions.

4. Set decision points: Regularly evaluate ongoing commitments and decide whether to continue based on current circumstances, not past investments.

5. Seek outside perspective: Ask someone who wasn't involved in the initial decision for their opinion, as they won't be influenced by sunk costs.

How to Understand Others

When someone continues investing in something that's clearly not working:

• They may be influenced by sunk cost fallacy, feeling they can't "waste" what they've already invested.

• They might be struggling with the emotional difficulty of admitting a mistake or letting go of past investments.

• Understanding that this is a common cognitive bias helps you provide support and perspective without judgment.

• Helping them focus on future outcomes rather than past investments can guide them toward better decisions.