Sunk Cost
Sunk cost fallacy is a cognitive bias refers to the phenomenon where people continue to invest resources (e.g., time, money, effort) in a failing project or situation in the belief that they have already invested too much to quit.
Reasons for sunk cost fallacy:
- Confirmation bias: The tendency to favor information that confirms our existing beliefs and ignore information that contradicts them.
- Avoidance bias: The tendency to avoid situations that make us feel uncomfortable or cause us to experience negative emotions.
- Ego depletion: The feeling of satisfaction we get from completing a task or achieving a goal, even if the task is not particularly enjoyable.
Examples of sunk cost fallacy:
- Continuing to invest in a stock or investment that is losing value.
- Spending money on a movie ticket even if you don’t enjoy the movie.
- Continuing to maintain a relationship with someone who is mistreating you.
How to overcome sunk cost fallacy:
- Identify your sunk costs: Make a list of the resources you have invested in a project or situation.
- Consider the opportunity cost: Weigh the potential benefits of abandoning the project or situation against the costs of continuing to invest.
- Be willing to walk away: If the project or situation is not worth continuing, don’t be afraid to cut your losses and move on.
Additional resources:
FAQs
What is a sunk cost with an example?
A sunk cost is an expense that has already been incurred and cannot be recovered. For example, if you buy a movie ticket but decide not to go, the money spent on the ticket is a sunk cost.
What is meant by sunk cost?
Sunk cost refers to money that has already been spent and cannot be recovered, regardless of future outcomes or decisions.
What is a sunk cost in engineering economics?
In engineering economics, a sunk cost is an investment in a project or asset that cannot be recovered if the project is altered or abandoned.
Why is sunk cost a fallacy?
The sunk cost fallacy occurs when people make decisions based on past costs that cannot be recovered, rather than considering future outcomes. This often leads to poor decision-making.
