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You are here: Home / Biases & Fallacies / The sunk cost fallacy

09/07/2012 by Sean Brady

The sunk cost fallacy

Once an individual has invested a substantial amount of time or other resources in a given course of action, he seeks reasons to justify this investment.
The greater the investment, the harder it is to write it off.

Robert Sternberg, The Triarchic Mind: A New Theory of Human Intelligence

Peristence and stubbornness. Both human behaviors. One is intelligent and the other clearly is not. The line between them is subtle. Many years ago I taught a remarkable young woman who became paraplegic as a result of a sledding accident. As a student, she was impressively stubborn. I knew that if she could transform her stubbornness into persistence, she would live a full and rich life. Fortunately, she has. Persistence is a virtue; stubbornness, a vice.

In decision-making, stubborn allegiance to poor investments can cloud our judgment. We make investments in relationships, stocks, homes, businesses, plans for our children, just about everything. Sometimes prior investments compel continued investment, despite clear evidence that there will be no return or worse a negative return. According to nobel laureate Daniel Kahneman in his recent book Thinking Fast and Slow, “The decision to invest additional resources in a losing account, when better investments are available, is known as the sunk-cost fallacy, a costly mistake that is observed in decisions large and small.”

The sunk-cost fallacy prevents us from cutting our losses when we should. We sell a winning stock rather than a losing stock. We refuse to price a home for less than we paid for it, despite the fact that it has been significantly devalued in a declining market. We languish in long-term relationships, even when they are unfulfilling or damaging.

The trick, says Kahneman, is to avoid “the escalation of commitment to failing endeavors” and to “ignore the sunk costs of past investments when evaluating current opportunities.”

When faced with the choice of making additional investment in a failing endeavor, be vigilant. Avoid the sunk-cost fallacy. Do not foolishly persist in justifying your prior effort. Your stubborn adherence to that sunk cost will consume the resources that you have available to invest in new, more promising opportunities.

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Filed Under: Biases & Fallacies Tagged With: biases, decision criteria, decision-making

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