Sunk cost fallacy

Sunk cost fallacy

Concept

The sunk cost fallacy is a cognitive bias that occurs when an individual makes a decision based on the money, time, or resources that have already been invested in a project, rather than evaluating the current and future potential of that project.

This can lead to irrational decision-making, as the individual may continue to invest in a project that is unlikely to be successful simply because they have already invested a significant amount of resources into it.

For example, imagine a person who has invested a significant amount of money into a business venture that is not performing well. Despite the poor performance, they may continue to invest more money into the venture because they have already invested so much and they feel that they cannot give up on it. This is an example of the sunk cost fallacy, as the person is basing their decision on the money that has already been invested rather than evaluating the potential for future success.

Sunk cost fallacy can also be seen in many personal and professional scenarios like continuing to invest in a failing relationship or a project which have no more chance of success. It is important to remember that the resources that have already been invested are gone and cannot be recovered, and that the decision should be based on the potential for future success rather than the resources that have already been invested. It’s important to keep in mind that past investment should not cloud judgment and should not be considered while making the decision.

In summary, the sunk cost fallacy is a cognitive bias that occurs when individuals make decisions based on the resources that have already been invested, rather than evaluating the potential for future success. This can lead to irrational decision-making and can result in the continued investment in projects that are unlikely to be successful.

Application

  • A company is producing a product that is not selling well, but they have already invested a significant amount of money into the product’s development and marketing. The company may continue to invest more money into the product, believing that they cannot give up on it because of the sunk cost. This is an example of sunk cost fallacy, as the company should evaluate the product’s potential for future success, rather than focusing on the resources that have already been invested.
  • A project manager is overseeing a project that is behind schedule and over budget. The manager may continue to invest more resources into the project, believing that they cannot give up on it because of the time and money that has already been invested. This is an example of sunk cost fallacy, as the manager should evaluate the project’s potential for future success, rather than focusing on the resources that have already been invested.
  • An investor is considering whether to sell their stock in a company that has not performed well. The investor may hold onto the stock, believing that they cannot give up on it because of the money that has already been invested. This is an example of sunk cost fallacy, as the investor should evaluate the company’s potential for future success, rather than focusing on the money that has already been invested.
  • A business leader is considering whether to continue investing in a new market or product line that is not performing well. The leader may continue to invest, believing that they cannot give up on it because of the resources that have already been invested. This is an example of sunk cost fallacy, as the leader should evaluate the potential for future success, rather than focusing on the resources that have already been invested.
  • A company is considering whether to continue investing in a failing partnership. The company may continue to invest, believing that they cannot give up on it because of the resources that have already been invested. This is an example of sunk cost fallacy, as the company should evaluate the potential for future success, rather than focusing on the resources that have already been invested.

Further reading:

Contributor:

Will Bachman