Even if costs are higher when we decide to follow through on a decision, such as going to the concert despite the rain and a cold, we can still frame the narrative as an overall success. If we fail to follow through on a decision, the narrative is one of failure, even if the subsequent decision not to continue to commit was actually in our best interest. One of the reasons not following through on a decision leads to a feeling of loss is because the overall endeavor gets framed together, instead of in stages. We may feel that our past investment will be ‘lost’ if we don’t follow through on the decision, and make a decision based on loss aversion rather than consider the benefits that would be gained if we did not continue our commitment. We are more likely to avoid losses than seek out gains. The sunk cost fallacy may in part occur due to loss aversion, which describes the fact that the impact of losses feels much worse to us than the impact of gains. We end up making decisions based on past costs and instead of present and future costs and benefits, which are the only ones that rationally should make a difference. We fail to take into account that whatever time, effort or money that we have already expended will not be recovered.
The sunk cost fallacy is associated with the commitment bias, where we continue to support our past decisions despite new evidence suggesting that it isn’t the best course of action. When we have previously invested in a choice, we are likely to feel guilty or regretful if we do not follow through on that decision. The sunk cost fallacy occurs because we are not purely rational decision-makers and are often influenced by our emotions. Since governments are sometimes using tax-payers’ money for projects, their adherence to the sunk cost fallacy can negatively affect us all. If governments and large companies like those involved in the Concorde project are susceptible to cognitive fallacies like the sunk cost fallacy, it is easy to see that significant amounts of money, time and effort are wasted because the sunk costs would never be recovered regardless of whether the project was abandoned. 4 Ultimately, this led to millions of dollars being wasted, and Concorde operated for less than 30 years. The manufactures and governments followed through on the project because they had already made significant financial investments and dedicated a lot of time to the project. 3 Long before the project was over, it was clear that there were increasing costs and that the financial gains of the plane, once in use, would not offset them. 2 French and British engine manufacturers and French and British governments were involved in the project that was estimated to cost almost 100 million dollars. In 1956, the Supersonic Transport Aircraft Committee met to discuss building a supersonic airplane, the Concorde. It also has been proven to impact the decisions that governments and companies make.Ī famous example of the sunk cost fallacy impacting large-scale decisions was coined the Concorde fallacy.
The sunk cost fallacy not only has an impact on small day-to-day decisions like attending a concert. These outcomes range from deciding to stay with a partner even if we are unhappy because we’ve already invested years of our lives with them, to continuing to spend money renovating an old house, even if it would be cheaper to buy a new one because we’ve already invested money into it. The fallacy affects many different areas of our lives leading to suboptimal outcomes. The sunk cost fallacy means that we are making irrational decisions because we are factoring in influences other than the current alternatives. If we acted rationally, only future costs and benefits would be taken into account, because regardless of what we have already invested, we will not get it back whether or not we follow through on the decision. It therefore should not be a factor in our current decision-making, because it is irrational to use irrecoverable costs as a rationale for making a present decision. 1 In the previous example, the $50 spent on concert tickets would not be recovered whether or not you attended the concert. In economic terms, sunk costs are costs that have already been incurred and cannot be recovered.
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