Fallacies and Cognitive Biases: Sunk Cost Fallacy ~ by Ransom

 

This article is part of an ongoing series that began with Fallacies and Cognitive Biases.

The above picture is a detail from "50 Cognitive Biases to be aware of so you can be the very best version of you"

"We invest more in things that have cost us something rather than altering our investments, even if we face negative outcomes."

This cognitive bias occurs when we invest in something to try to salvage prior investments instead of evaluating this new investment on its own terms.

For example, if you purchase a motorcycle for a thousand dollars, then attempt to resell it but the highest offer anyone will make is $800.  If you refuse to sell because you will be "losing money" you are in the clutches of the sunk cost fallacy.

The money initially spent on the motorcycle is in the past.  There's nothing you can do about it.  Your decision should be made based on the numbers moving forward.  Is $800 worth more to you than the bike?  If so sell.  If not keep.  That's the only decision that matters.

This cognitive bias helps people complete some types of tasks but not others.

If the task is an ongoing process the Sunk Cost Fallacy will help participants work through the loss of enthusiasm that comes with realizing how much boring work is actually involved.  These processes have a beginning and an end.  Sticking to the task constitutes movement towards the end.

If the "task" is actually a set of discrete decisions that our minds bundle together into an ongoing story, the Sunk Cost Fallacy will trick us into unprofitable ongoing participation.  We act as if each investment builds on the previous one towards a definite end, but that's not true.  Each investment is separate and should be considered on its own merits.

Building a house is an example of an ongoing task.  Each investment builds on the one before & contributes to the total process.

Filling in a sinkhole is an example of a series of discrete actions that our minds misconstrue as an ongoing task.  New fill does not contribute to a solution.  It does not build on the old fill.  The old fill is gone.

Our minds have an affinity for patterns and stories.  We have a tendency to see them even when they are absent.  The Sunk Cost Fallacy leads us astray when we treat uncorrelated events as an advancing process.

See Confirmation Bias