Have you ever experienced a disappointing hotel breakfast while on vacation? Despite not enjoying the food options, you feel obligated to eat it since you already paid for it as part of your booking. This behavior can be attributed to the “sunk cost fallacy,” which refers to our inability to ignore costs that have already been spent and cannot be recovered. In the case of the hotel breakfast, the sunk cost is the price paid for the hotel package. At the time of deciding where to eat breakfast, these costs are already unrecoverable and should be disregarded.
Similar examples of the sunk cost fallacy include forcing oneself to finish a boring book or TV series because of the time already invested in it, or being reluctant to quit exclusive groups like sororities or sporting clubs after completing a challenging initiation ritual.
Although these behaviors are irrational, they are quite common. It is important to be aware of this tendency. In some situations, you may even be able to use the sunk cost fallacy to your advantage.
Sunk costs can also impact significant decisions in our lives. For instance, imagine someone named Bob who bought a house for $1 million. Due to a housing market crash, all houses are now 20% cheaper, and Bob can only sell his house for $800,000. Despite the opportunity to upgrade to a bigger house at a lower price, Bob refuses because he perceives a loss of $200,000 compared to the original price he paid. Bob is falling victim to the sunk cost fallacy by letting the original price influence his decision-making. Only the current and projected price of the house should matter.
Although Bob’s behavior may seem irrational, it is a common human tendency. We often find it difficult to ignore losses because they have a stronger psychological impact than gains. This is known as loss aversion.
While most evidence of the sunk cost fallacy comes from individual decisions, it can also affect group decisions. For example, the French and British governments continued funding the doomed supersonic airliner, Concorde, long after it was clear that it would not be commercially viable. Similarly, prolonged armed conflicts can continue due to the belief that surrendering would make the casualties “die in vain.”
Understanding the concept of sunk costs can be beneficial. If you catch yourself justifying behavior based on past costs rather than present circumstances or future predictions, it is worth reassessing your decision-making. Recognizing sunk costs allows you to cut your losses early and move on, rather than perpetuating larger losses. In the housing example, the larger the market crash, the cheaper the opportunity to upgrade to a bigger house becomes. However, the perceived loss from selling the existing house also increases due to the sunk cost fallacy, resulting in a greater loss of opportunity.
If you struggle to overcome the sunk cost fallacy, delegating such decisions to others may help. This could include letting someone else decide whether to go to a buffet or subscribe to Netflix. Additionally, using the fallacy to your advantage can be beneficial in certain situations. For example, choosing a gym membership with a large upfront fee and minimal pay-per-usage fees may motivate you to commit to a regular gym routine.
However, it is important to note that the sunk cost fallacy does not work in all scenarios. Spending extravagantly on a wedding ceremony or engagement ring, for instance, does not increase the likelihood of a successful marriage.