The other day while browsing through my feed on Quora, I came across this wonderful concept of economics which can be extrapolated to the realms of psychological decision-making and was surprisingly intrigued by its impact on our lives. The sunk cost fallacy affects us in a subtle manner almost every day and we being completely oblivious to its existence let it get the better of us. However, the mere realisation that it exists can do wonders to our productivity and our decision-making abilities.
Attachment is ingrained in our nature. Once we invest in something, it is really hard for us to let go until the entire value of the investment comes back to us as returns. But we do make bad decisions; often. The sunk cost fallacy prevents us from admitting our failure and proves to be disastrous in the long run. It forces us to make consequent irrational decisions.
The sunk cost is a cost that has already been incurred and thus cannot be recovered.
Almost every one of us has overstuffed ourselves with food at restaurants citing the logic that since we have already ordered it, we might as well eat it or our money will go waste. The same goes with monetary investments by individuals in shares, by businesses in a new product or geography and the government in projects. The underlying similarity among all entities is that they base their decisions on past behaviour and are reluctant to understand the fact that the money or time once gone won’t come back i.e. it is a part of the sunk cost now. Rather, they live in a delusion and often end up investing more of their resources to vindicate their initial choices when the decision of leaving, stopping, letting go or taking back would actually serve them in the best possible manner going forward. The overeating can have detrimental consequences on our health and can, in fact, lead to further investments on medicine bills. However, if the food is left as it is, it goes to the trash. We save ourselves from subsequent harm.
The sunk cost fallacy is also referred to as the ‘Concorde Fallacy’. The name is derived from an incident that is a true testament to the fact that the sunk cost fallacy exists and has a profound impact on us. Here is a part of an article that appeared on Forbes to illustrate the etymology:
In 1956, the Supersonic Transport Aircraft Committee met in England to discuss building a supersonic airliner by British aircraft and engine manufacturers and the government. The project – named Concorde – moved forward, and in 1962 France joined the group.
When the wheels came up on the first Concorde commercial flight in January 1976, the enterprise was already plagued by prohibitive cost overruns. By the last Concorde flight in 2003, the Anglo/French financial misadventure had become legendary. The good news is it produced a handy metaphor that covers valuable business lessons.
As mentioned earlier, the mere acknowledgement that our subconscious mind makes us fall in the trap of the sunk cost fallacy is the first step towards reducing the number of bad decisions we take. The fear of losing what is already gone should not lead to more investment in a futile attempt to mend, save or correct something that is wrong. The right decision is always tough to make but we should not let a fallacy blindsight our logical thinking process.