Sunk Cost Fallacy
By: Moritz vetter
Imagine how you would react in the following situations:
1. You’re in the cinema. Unfortunately, the movie turns out to be boring and you know you won’t enjoy it. What do you do:
A: Leave and use the time for something else.
B: Stay and watch the movie till the end because you paid for the ticket.
2. You’re in a café eating ice cream. You’re feeling quite full already and have no need to eat more. Do you…
A: Stop eating.
B: Finish the whole ice cream because you have to pay for it anyway .
3. You have been working on a project for several weeks and invested a lot of your time into it. Still the results are way below your expectations and there is no guarantee the project will become profitable in the future.
A: You decide to cancel the project immediately.
B: You keep on working in the hope that tides will turn.
Be honest: In how many of these situations would you choose (or have chosen in the past) option B? In all 3 cases, option A would be the rational thing to do. However, many people tend to go for option B, leading to them losing even more time and money . The reason for this is a cognitive bias: The mistake of letting sunk costs affect your decision making process.
What are sunk costs? Sunk costs are expenses from the past that cannot be reverted by decisions in the present
or future. No matter what you do next, the invested money is gone and can’t be retrieved. Therefore, these costs should be irrelevant for your decision making.
Sunk costs are not the same as fixed costs. Let’s say a company buys a new machine to produce more units. The sunk costs are the initial expenses for the purchase of the machine. The fixed costs are the ones arising by running the machine every month, regardless of the number of units produced. The fixed costs are the same each month, however, you can avoid them by not running the machine at all. Here lies the difference between fixed and sunk: The sunk costs cannot be influenced anymore. It doesn’t matter if you run the machine or not: You already paid for it anyway. Sure, you can try to sell the machine again. But it’s unlikely you can sell it for the original purchase price. At least a big chunk of the original costs for buying the machine are sunken forever.
Sunk cost fallacy means that you pay too much attention to the sunk costs in a situation where you should rather ignore them . Because sunk costs are irreversibly lost they should not be taken into consideration when making a decision. What matters is the future and the present situation. Is it reasonable to keep on spending money/ time /resources ? The answer to this question should determine what you do. The last thing you should do is using past expenses as an argument for investing more. Often people argument for prolonging a project by saying:
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