Why are we likely to continue with an investment even if it would be rational to give it up?

The Sunk Cost Fallacy

, explained.
Bias

What is the sunk cost fallacy?

The sunk cost fallacy is our tendency to follow through with something that we’ve already invested heavily in (be it time, money, effort, or emotional energy), even when giving up is clearly a better idea.

A cartoon illustrating the sunk cost fallacy. A stick figure stands at the edge of a cliff, throwing coins into the water below, saying, 'I already started, so I might as well keep going...' A fish in the water has a speech bubble saying, 'I’m rich!' while a nearby insect with a speech bubble containing ellipses ('...') observes the situation. The image humorously depicts the irrational decision to continue investing in a failing endeavor due to the amount already invested.

Where this bias occurs

Imagine that you bought a concert ticket a few weeks ago for $50. Beyond the cost, you are super excited. All of your friends will be in attendance and the band playing is one of your favorites. However, on the day of the concert, you feel sick, and it’s raining outside. You know that traffic will be worse because of the rain and that you risk getting sicker by going to the concert. Although it seems that the current drawbacks outweigh the benefits, why are you still likely to choose to go to the concert?

This is known as the sunk cost fallacy. We are likely to continue an endeavor if we have already invested in it, whether it be a monetary investment or the effort we put into the decision. That often means we go against evidence that shows it is no longer the best decision, such as sickness or weather affecting the event.

Related Biases

Sources

  1. Bondarenko, P. (2015, November 23). Sunk cost. Encyclopedia Britannica. https://www.britannica.com/topic/sunk-cost
  2. Blasingame, J. (2011, October 3). Beware of the Concorde fallacy. Forbes. https://www.forbes.com/sites/jimblasingame/2011/09/15/beware-of-the-concorde-fallacy/#5655b8334e22
  3. Amirani, A. (Director). (2003). Concorde: A Love Affair [Timewatch episode]. BBC.
  4. Arkes, H. R., & Ayton, P. (1999). The sunk cost and Concorde effects: Are humans less rational than lower animals? Psychological Bulletin, 125(5), 591-600. https://doi.org/10.1037/0033-2909.125.5.591
  5. Jarmolowicz, D. P., Bickel, W. K., Sofis, M. J., Hatz, L. E., & Mueller, E. T. (2016). Sunk costs, psychological symptomology, and help seeking. SpringerPlus, 5(1), 1-7. https://doi.org/10.1186/s40064-016-3402-z
  6. Herrmann, P., Kundisch, D., & Rahman, M. S. (2015). Beating irrationality: Does delegating to IT alleviate the sunk cost effect? SSRN Electronic Journal, 61(4), 831-850. https://doi.org/10.2139/ssrn.1941331
  7. Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39-60. https://doi.org/10.1016/0167-2681(80)90051-7
  8. Arkes, H. R., & Ayton, P. (1999). The sunk cost and Concorde effects: Are humans less rational than lower animals? Psychological Bulletin, 125(5), 591-600. https://doi.org/10.1037/0033-2909.125.5.591
  9. National Center For Educational Statistics. (n.d.). Fast facts: Expenditures. Retrieved August 17, 2020, from https://nces.ed.gov/fastfacts/
  10. Coleman, M. D. (2010). Sunk cost, emotion, and commitment to education. Current Psychology, 29(4), 346-356. https://doi.org/10.1007/s12144-010-9094-6
  11. Strough, J., Mehta, C. M., McFall, J. P., & Schuller, K. L. (2008). Are older adults less subject to the sunk-cost fallacy than younger adults? Psychological Science, 19(7), 650-652. https://doi.org/10.1111/j.1467-9280.2008.02138.x
  12. Summerfield, C., & Tsetsos, K. (2015). Do humans make good decisions?. Trends in cognitive sciences. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4286584/ 
  13. Roadmunk. (n.d.). Sunk cost. https://roadmunk.com/glossary/sunk-cost/#:~:text=The%20opposite%20of%20a%20sunk,be%20considered%20when%20evaluating%20options
  14. Asana. (n.d.). Sunk cost fallacy: What it is and how to avoid it. https://asana.com/resources/sunk-cost-fallacy

About the Authors

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Dan Pilat

Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.

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Dr. Sekoul Krastev

Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.

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