5 Examples of Sunk Cost Fallacy

Examples of Sunk Cost Fallacy

The sunk cost fallacy is a behavior that most people exhibit to one degree or another. It can also show up as a business issue. Put into a phrase you might already know, it basically means that you’re willing to throw good money after bad. Let’s look at five examples of sunk cost fallacy. See if you can learn ways to make better financial decisions as a result of exploring these examples.

What Is a Sunk Cost?

A sunk cost is a cost that you’ve already paid. Moreover, you can’t get it back. For example, if you already paid your rent, you can’t get that back (barring some really extreme circumstances). If you bought non-refundable tickets to an event, you can’t get that back. If you hired someone, you can’t get back the money that you already paid them for the work that they’ve done. These are all sunk costs.

What Is The Sunk Cost Fallacy?

The sunk cost fallacy is a behavioral or psychological reaction to dealing with sunk costs. It means that we feel invested in the thing, so we continue to put more time, money, and energy into it. The fallacy is that we hope we’ll get some kind of return out of it, despite the reality that we won’t.

BehavioralEconomics.com notes that some of the reasons we give in to examples of sunk cost fallacy include:

  1. We don’t want to feel like what we already did was wasted.
  2. Dislike of change keeps us stuck in the status quo.
  3. Due to loss aversion we feel those losses more than the gains and it’s painful to believe we’re losing out.
  4. We invested because we expect a reward. We don’t want to give up on the potential of getting that reward – at any cost, however illogical.
  5. We feel a commitment to what we already started. Therefore, someone who values honoring commitments will be more likely to give in to examples of sunk cost fallacy.

I would add that FOMO is another reason that sometimes causes this action.

5 Examples of Sunk Cost Fallacy

Okay, so you get the basic idea, right? Now, let’s consider some examples of sunk cost fallacy.

1. Event Tickets

This is one of the most oft-cited examples of sunk cost fallacy. It’s an easy one to understand. Let’s say that you spent a lot of money on tickets to see Hamilton. They aren’t refundable. You probably won’t get the chance to go again. However, you are dreadfully sick. You probably shouldn’t go because you’ll likely get worse if you don’t stay home and treat your cold. Plus, you’re exposing other people to illness. And yet, due to FOMO or the feeling that you’ve already invested the money or some other aspect of the sunk cost fallacy, you go. Then you get more sick and have to take time off of work and actually lose more money. Plus chances are you don’t even enjoy the show that much because you were sick. That’s all happened because of the sunk cost fallacy.

2. Keeping Inefficient Employees Too Long

Here’s one that happens a lot in business, especially in small businesses. You’ve hired someone. You’ve invested time, money, energy, and possibly emotion into training them. You’ve paid them quite a few paychecks so far. However, they just aren’t up to par. And yet, you don’t want to fire them. There might be many reasons. However, one could be that you feel like you already invested so much in them that you don’t want to lose them and have to invest in someone else anew. Yet, they aren’t working out. You’re continuing to pay them. You’re throwing good money after bad. This is one of the business examples of the sunk cost fallacy.

3. The Concorde Fallacy

People who study examples of sunk cost fallacy often mention The Concorde Fallacy. The Decision Lab explains that in 1956, French and British manufacturers and governments met together to discuss building a supersonic airplane. Obviously, it was called The Concorde. Businesses and governments both spent so much money on this airplane. They had initially estimated a $100 million cost, which is already a lot of money. Then, as the project continued, everyone realized that it would cost even way more than that. They knew relatively early on that they were never going to recoup those costs. And yet, they pressed forward. The Concorde was in operation for less than three decades and never earned that money back. It would have been significantly more cost effective to stop the work when they realized that they were losing so much. However, they gave in to the sunk cost fallacy.

4. Arkes and Blumer Examples of Sunk Cost Fallacy

The Decision Lab article goes on to explore research completed by Arkes and Blumer about sunk costs. One example that they gave was:

  • You’ve paid $100 to plan a trip to Place A.
  • You’ve paid $50 to plan a trip to Place B.
  • Unfortunately, you’ve just realized that they’re both on the same day.
  • Moreover, you can’t change the dates or get your money back.
  • However, you are pretty sure you’d have the most fun at Place B.
  • Which place do you go to?

In their study, more people chose to go to Place America despite believing they’d have more fun at Place B. Why? Because they’d invested more money in it. It’s not a logical decision. You lose money either way. Ideally, you should go to what’s more fun. But because of our money psychology, we don’t always make those decisions.

5. Watching/ Reading To The End of Boring Media

Another great example The Decision Lab gave was watching a boring movie all the way to the end. I see this with TV series, books, and other forms of media. People start a book, they get thirty pages in, and they know that they don’t like it. However, they keep reading it! There are so many great books in the world … why read something you’re obviously not into? Because you’ve already invested the time. Maybe you also paid for the book. This is one of those examples of sunk cost fallacy that I think all of us can relate to on one level or another.

So, consider how you make decisions about how to move forward in the now with situations where you’ve already spent money. Should you press on or should you reassess?

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