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.
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, endeavor, 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.
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:
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.
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.
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 behavioral 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:
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.
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 endeavor even when evidence suggests it’s not the best course of action.
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.
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 recognize 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:
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:
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 recognize 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.
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 sick, 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.