Jun 9th, 2008
Working Backwards: What’s the Sunk Cost Fallacy?
A “sunk cost” is a cost that has already been paid for a project or investment–possibly a substantial one–and is very unlikely to be recovered. An example of this may be spending a substantial amount to repair a car that has multiple problems and may continue to incur substantial repair costs in the future. Rather than selling the vehicle or disposing of it and purchasing a different one with fewer problems, the owner may reason that, “If I get something else, everything I’ve invested has been wasted.” While the reasoning may technically be accurate, it’s not a relevant reason to continue to put money into the vehicle. The economically sound decision would be to start over, but many cannot because of the feeling that they will then lose whatever they’ve put in–when the reality is, they’ve already lost whatever they’ve put in.
The sunk cost fallacy can also move into other areas of life, such as time spent on a project (even a large project such as a college degree or job) or emotional investment into a relationship. There is a time when more investment into a losing proposition is simply a way to incur more losses, and it’s at that time that it becomes wiser to call it a day and head elsewhere.
Consider if what you’re getting yourself into deeper–whether it’s financial or otherwise–is a promising investment or a case of sunk costs. It’s not the easiest issue to deal with, but it may help you avoid larger losses in the future.
