Sunk Cost Fallacy
What is Sunk Cost Fallacy?
The sunk cost fallacy is continuing an endeavor because of money or effort already spent, even when it is no longer worthwhile.
Rational decisions should ignore sunk costs (which can't be recovered) and weigh only future costs and benefits. People fall into this trap because of loss aversion and a reluctance to 'waste' past investment.
Sunk Cost Fallacy: a worked example
A student film club has spent $4,200 shooting a short. Finishing it needs another $1,500 for editing and sound. The club's honest estimate of what the finished film brings in at festivals is $900. The only comparison that matters is $1,500 out against $900 in, so finishing loses another $600. Quit now and the club is down $4,200; finish and it is down $4,200 + $1,500 - $900 = $4,800. The $4,200 sits identically in both columns, which is exactly why it should not enter the decision. Saying the club has already put in $4,200 is the fallacy talking.
The mistake students make with sunk cost fallacy
The tempting thought is that quitting wastes the money already spent, so continuing at least gives it a chance to pay off. The money is gone in both branches; it cancels out of the comparison and cannot be recovered by pressing on. A related mix-up is treating sunk and fixed costs as the same thing. A signed lease you can break next month is a fixed cost that is still avoidable going forward, while a non-refundable deposit paid last spring is sunk.
Sunk Cost Fallacy questions
What is an example of the sunk cost fallacy in everyday life?
The sunk cost fallacy shows up whenever past spending keeps you in something you would not choose today. Sitting through the second half of a bad film because the ticket cost $14 is the classic case, since the $14 is gone whether you stay or leave and only your next two hours are still in play. Finishing a meal you dislike, staying in a course you paid for and grinding on a hobby you stopped enjoying share the same shape.
Is the sunk cost fallacy the same as loss aversion?
The sunk cost fallacy and loss aversion are related but not identical. Loss aversion is the underlying feeling, that losses register more heavily than equivalent gains, and the sunk cost fallacy is one decision error it produces, because abandoning a project forces you to book the loss instead of leaving it open. Loss aversion also drives behavior with no past spending involved, such as refusing a fair coin-flip bet.
How do you avoid the sunk cost fallacy?
Avoiding the sunk cost fallacy starts with one question: if I were arriving fresh today, with no history here, would I spend this money and time? Write the answer down before you look at what has been spent. Setting quit conditions in advance helps too, since a rule written when you had no stake is harder to rationalize away. Asking an outsider works for the same reason, because they carry none of your spending.
Related terms
Common comparisons
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