The sunk cost fallacy trap is a pitfall people often fall prey to.
It is well-documented that people aren’t strictly rational beings. Our decision-making processes are influenced by our emotional biases, such as the commitment and the status quo bias. Both can help explain our proclivity towards a lost cost fallacy bias.
Let me explain how it negatively affects our judgment.
The psychology of sunk cost
The psychology behind the sunk cost fallacy is well-researched and understood.
This bias in decision-making is a real thing and can negatively impact our judgments.
People aren’t purely rational beings. And even though we pride ourselves on our logical thinking and our common sense, our decision-making processes are still heavily influenced by our emotions, personal biases, and subjective interpretations.
When we feel like we’ve invested in something, whether it’s time, effort, money, or all of them, we’re likely to feel ashamed and bad if we vacate following through on that decision or project. This is because we feel we’ve wasted our time and effort in that particular endeavor.
The psychology behind the sunk cost fallacy can be explained due to 3 main mechanisms:
Commitment bias
A commitment bias is when we follow through with a decision we’ve made, even though we have evidence that it is not the best course of action and is actually hampering ourselves and negatively impacting our results.
It means that we fail to take into account that all the investments we’ve made in the past are not working out and paying off in the immediate present and future.
We end up making our decisions based on the past cost of the investments we’ve made instead of the present and future costs.
Status quo bias
The status quo bias alludes to the innate desire of people to let things stay the way they are and to undertake no action to make change happen.
In the Concorde fallacy case, the status quo means that people are likely to stick to their decisions or actions for the sake of preferring things to stay the way they are.
Research has shown that this can occur even when the cost of change is small and when the decision is of great importance (Samuelson, & Zeckhauser, 1988). [1]Samuelson, W., & Zeckhauser, R. J. (1988). Status quo bias in decision-making. Journal of Risk and Uncertainty, 1, 7-59.
Status quo bias is consistent with loss aversion bias.
It can psychologically be explained by commitments made in the past, lost cost fallacy thinking, regret avoidance, the need to feel in control, and cognitive dissonance.
Loss aversion
Loss aversion means that we feel our losses more heavily than we do our gains.
Since we experience our losses more intensely, we typically try to avoid losses rather than seeking out gains.
Regarding the sinking cost fallacy, we may feel like we’ve “lost” the investment we’ve made if we decide to discontinue our initial endeavor or if we fail to follow through on our decision.
That means that we make our decision based on loss aversion and commitment bias when talking about sunk cost fallacy, rather than based upon what we can gain.
Research has shown that both mice and humans are affected by the sunk cost fallacy after they’ve made the conscious decision to chase after a reward (Sweis et al., 2018). [2]Sweis, B. M., Abram, S. V., Schmidt, B. J., Seeland, K. D., MacDonald, A. W., Thomas, M. J., & Redish, A. D. (2018). Sensitivity to “sunk costs” in mice, rats, and humans. … Continue reading
Frequently Asked Questions (FAQ)
What does “sunk cost fallacy” mean?
The sunk cost fallacy in psychology refers to our tendency to stick with an endeavor if we feel like we’ve already invested a lot of effort, time, and/or money into it. We find it hard to give up things we’ve invested valuable effort into.
It can cause us to follow through with an endeavor whether the cost outweighs the benefits or not. It
It can be described as a form of commitment bias.
So how do we define a bias?
A bias can be defined as having a disposition or prejudice against or for something, an individual, or a group. This prejudice or disposition is typically in a manner that is especially unfair or dishonest towards an individual or group.
Sunk cost fallacy synonyms
Synonyms of the sunk cost fallacy bias include retrospective cost, Concorde fallacy, lost cost fallacy, and sinking cost fallacy.
And while the phrasing is different, the meaning of those words remains the same.
Sunk cost fallacy examples
Sunk cost example 1
An example of a sunk cost bias could be that you are currently on a diet, but fail to resist temptation one time at dinner and eat that delicious pizza that you’ve been craving for a long time.
The reason that your diet can be ruined because of this, is because you decide to keep sinning, and eating bad food instead of pulling yourself together and continuing your diet.
In this case, the person reasoned that sinning once meant they’d made an investment to stop dieting and that “the diet was doomed anyway.”
Sunk cost fallacy example 2
Another example of the sinking cost fallacy is staying together with your partner of 5 years, even though the love and affection have long been extinguished.
You might reason that you’ve invested 5 years of your life into building a life with your partner and that breaking up would be a waste of that time and considered a failure.
Furthermore, it would mean having to admit choosing wrong and possibly wasting a lot of your precious, valuable time.
Sunk cost example 3
The same can be said about someone’s career.
If someone has loyally been working for the same boss for 15 years, then they will be hesitant to switch careers or to take a different job. The reason is because of the time and effort one had to initially invest to get their current job.
Even though switching to a different career would be beneficial for that person in the present and the future, they decide to remain at their current job because of their past investment.
Sunk cost fallacy bias example 4
Another famous example could be shopping related.
If someone drove 20 miles (ca. 32 km) just to go shopping, then they are more likely to buy something because they reason that “I already drove all that way and put that much time and effort into it, I better make it worth it and buy something.”
Of course, objectively speaking, that reasoning is flawed when we buy something we don’t want or need and thus are probably not going to wear anyway. Yet, we still decide to buy something anyway.
Final note
Now that we understand the psychology behind the sunk cost fallacy, we can start using it as a tool to protect ourselves from the sunk cost bias.
Humans have a proclivity to unknowingly exhibit this particular bias, and we know that the sunk cost bias in decision-making hurts our judgment.
Thus, we must make it a point to prevent this from happening. We can accomplish that by becoming aware of when the sunk cost bias is occurring and affecting our decision-making processes. This can aid us in making more objective calls that produce better outcomes.
Developing and utilizing your critical thinking skills will be vital to prevent falling prey to the sunk cost fallacy bias.
References
| ↑1 | Samuelson, W., & Zeckhauser, R. J. (1988). Status quo bias in decision-making. Journal of Risk and Uncertainty, 1, 7-59. |
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| ↑2 | Sweis, B. M., Abram, S. V., Schmidt, B. J., Seeland, K. D., MacDonald, A. W., Thomas, M. J., & Redish, A. D. (2018). Sensitivity to “sunk costs” in mice, rats, and humans. Science, 361(6398), 178-181. |
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