What Is the Sunk Cost Fallacy? | Definition & Examples
The sunk cost fallacy is the tendency for people to continue an endeavour or course of action even when abandoning it would be more beneficial. Because we have invested our time, energy, or other resources, we feel that it would all have been for nothing if we quit.
As a result, we make irrational or suboptimal decisions. The sunk cost fallacy can be observed in various contexts, such as business, relationships, and day-to-day decisions.
What is the sunk cost fallacy?
The sunk cost fallacy occurs when we feel that we have invested too much to quit. This psychological trap causes us to stick with a plan even if it no longer serves us and the costs clearly outweigh the benefits.
The sunk cost fallacy can be observed in major life decisions, such as continuing to study something that does not interest us simply because we already paid a high amount in tuition fees; but also in simple, everyday life decisions (such as watching a movie till the end even if it’s boring).
In economics, a sunk cost refers to money that has already been spent and cannot be recovered. More generally, sunk costs can be anything that you have invested and cannot get back: the time you have spent in a relationship or the effort you have made to pass your first year in college.
Here are some examples of how the sunk cost fallacy can manifest:
- Staying in a relationship even though you are unhappy because of all the years you’ve spent together
- Thinking that you can’t change your dissertation topic because you have invested so much time into it
- Remaining in a job that is not satisfying because of all the months of training you had to undergo
- Sticking to your major, even though you realise it’s not the career path you want to pursue, because you already took several classes
Why is the sunk cost fallacy a problem?
The sunk cost fallacy leads people to believe that past investments (i.e., sunk costs) justify further investments and commitments. They believe this because the resources already invested will be lost.
In rational decision-making, sunk costs should not play a role in our future actions because we can never get back the money, time, or energy we have invested – regardless of the outcome.
Instead of considering the present and future costs and benefits, we remain fixated on our past investments and let them guide our decisions.
This is a fallacy or flawed reasoning (like the red herring fallacy or ecological fallacy) that creates a vicious circle of poor investments, also known as “throwing good money after bad”.
Why does the sunk cost fallacy happen?
The sunk cost fallacy occurs because we are not always rational decision-makers. On the contrary, we are often influenced by our emotions, which tie us to our prior commitments even in the face of evidence that this is not in our best interests.
The following factors can help explain why the sunk cost fallacy happens:
- Loss aversion. Because losses tend to feel much worse than gains, we are more likely to try to avoid losses than seek out gains. The more time and other resources you commit to something, the more loss you will feel when walking away.
- Framing effect. Our perception of a situation or an option depends on whether it is cast in a negative or a positive light. In combination with loss aversion, under the sunk cost fallacy, we believe that abandoning a project equals a loss (negative frame), even though it’s perfectly rational to stop wasting our resources on something that doesn’t work. Following through instead allows us to frame our decision as a success (positive frame).
- A desire to avoid waste. One reason why we fall for the sunk cost fallacy is that stopping would mean admitting that whatever resources we invested up until then had been wasted. Wastefulness is clearly not a desirable quality. This explains, for instance, why we try to finish reading a book that we dislike: if we stop, it feels like the time we have spent reading so far was wasted.
- Optimism bias. This means that we overestimate the chances that our efforts will bear fruit in the end, causing us to ignore any red flags. As a result, we keep pouring money, time, or energy into projects because we are convinced that it will all pay off eventually.
- Personal responsibility. The sunk cost fallacy affects us most when we feel responsible for a decision and the sunk costs that accompany it. This creates an emotional bias causing us to cling to the project, decision, or course of action for which we feel personally responsible.
Sunk cost fallacy example
The sunk cost fallacy can affect our decisions in response to other people’s past investments.
In one experiment, participants were asked to imagine that they were at a potluck party and that, after eating a few bites of a rich cake, they felt full. Some were told the cake had been purchased from a local bakery on sale, while others were told the cake was expensive and had come from a shop an hour’s drive away.
In each scenario, participants were asked to imagine that they had bought the cake themselves, or that someone else had brought it to the potluck. They were then asked whether they would finish the cake despite feeling full.
According to the results, people who were told they were eating the expensive cake were far more likely to say they would keep eating. Interestingly, this had nothing to do with who had bought it – friends, strangers, or the participants themselves.
These findings show that the sunk cost fallacy has also an interpersonal dimension (i.e., people will alter their choices to honor others’ investments and not just their own).
How to overcome sunk cost fallacy
Overcoming the sunk cost fallacy can be challenging, but the following strategies can help you:
- Pay attention to your reasoning. Are you prioritising future costs and benefits, or are you held hostage to your prior investment or commitment – even if it no longer serves you? Do you factor new data or evidence into your decision to continue or abandon a project?
- Consider the “opportunity cost”. If you continue investing in a project or a relationship, what are you missing out on? Is there another path that could bring you more benefit or fulfilment?
- Avoid the trap of emotional investment. When you feel emotionally invested in a project, you may lose sight of what is really going on. That’s when the sunk cost fallacy kicks in and sends you down the wrong path. Seeking advice from people who are not emotionally involved can be an eye-opener and help you make an informed decision.
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Frequently asked questions about the sunk cost fallacy
- What is the difference between the sunk cost fallacy and escalation of commitment?
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The sunk cost fallacy and escalation of commitment (or commitment bias) are two closely related terms. However, there is a slight difference between them:
- Escalation of commitment (aka commitment bias) is the tendency to be consistent with what we have already done or said we will do in the past, especially if we did so in public. In other words, it is an attempt to save face and appear consistent.
- Sunk cost fallacy is the tendency to stick with a decision or a plan even when it’s failing. Because we have already invested valuable time, money, or energy, quitting feels like these resources were wasted.
In other words, escalating commitment is a manifestation of the sunk cost fallacy: an irrational escalation of commitment frequently occurs when people refuse to accept that the resources they’ve already invested cannot be recovered. Instead, they insist on more spending to justify the initial investment (and the incurred losses).
- What are common types of fallacy in research?
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A fallacy is a mistaken belief, particularly one based on unsound arguments or one that lacks the evidence to support it. Common types of fallacy that may compromise the quality of your research are:
- Correlation/causation fallacy: Claiming that two events that occur together have a cause-and-effect relationship even though this can’t be proven
- Ecological fallacy: Making inferences about the nature of individuals based on aggregate data for the group
- The sunk cost fallacy: Following through on a project or decision because we have already invested time, effort, or money into it, even if the current costs outweigh the benefits
- The base-rate fallacy: Ignoring base-rate or statistically significant information, such as sample size or the relative frequency of an event, in favor of less relevant information e.g., pertaining to a single case, or a small number of cases
- The planning fallacy: Underestimating the time needed to complete a future task, even when we know that similar tasks in the past have taken longer than planned
Sources for this article
We strongly encourage students to use sources in their work. You can cite our article (APA Style) or take a deep dive into the articles below.
This Scribbr articleNikolopoulou, K. (2023, November 01). What Is the Sunk Cost Fallacy? | Definition & Examples. Scribbr. Retrieved 9 December 2024, from https://www.scribbr.co.uk/fallacy/the-sunk-cost-fallacy/
Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140. https://doi.org/10.1016/0749-5978(85)90049-4
Olivola, C. Y. (2018). The interpersonal sunk-cost effect. Psychological Science, 29(7), 1072-1083. https://doi.org/10.1177/0956797617752641
