Sunk Cost Fallacy: Definition, Questions and Examples

Sunk Cost Fallacy

Definition:

The sunk cost fallacy refers to the irrational tendency of individuals to continue investing resources (such as time, money, or effort) into a project, decision, or endeavor solely because they have already invested a significant amount, despite the likelihood of further loss or negative outcomes.

Alternative Names:

1. Retrospective Cost Fallacy
2. Concorde Fallacy
3. Escalation of Commitment

5 Questions to Determine if One is Using Sunk Cost Fallacy:

1. Am I continuing with this decision primarily because of the resources I've already invested?
2. Would I still pursue this course of action if I had not already invested resources into it?
3. Am I overly focused on recouping past losses rather than considering future gains or losses?
4. Do I feel emotionally attached to the resources I've invested, influencing my decision-making?
5. If I were to objectively evaluate the situation, does it still make sense to continue investing in this manner?

5 Questions to Find Solutions and Overcome Sunk Cost Fallacy:

1. What are the current costs and benefits associated with continuing this course of action?
2. If I were to make this decision anew, without considering past investments, what would I choose?
3. Can I identify any biases or emotions influencing my decision-making process?
4. What are the potential long-term consequences of continuing to invest based on sunk costs, versus cutting losses and reallocating resources elsewhere?
5. Have I considered seeking advice or input from impartial parties to gain a fresh perspective on the situation?

Personal Relationship Example:

Imagine you've been in a toxic relationship for several years. Despite constant conflicts and unhappiness, you find it hard to break up because of the time, effort, and emotions you've invested. You continue to stay in the relationship, hoping things will improve solely because of the history you've shared.

Business Example:

A company invests millions of dollars in developing a new product. As the project progresses, it becomes evident that the market demand is lower than expected, and competitors have introduced similar, more innovative products. Despite these challenges, the company continues to pour resources into the project, citing the large sum already invested, rather than reassessing the viability of the product and reallocating resources to more promising ventures.

Related Fallacies:

1. The Gambler's Fallacy: Believing that past outcomes influence future probabilities, such as in gambling or investing.
2. The Endowment Effect: Overvaluing items simply because you own them, leading to irrational decision-making.
3. Loss Aversion: The tendency to prefer avoiding losses over acquiring equivalent gains, often leading to irrational decisions.
4. Status Quo Bias: Preferring to keep things the same rather than making changes, even when change may be beneficial.