The Sunk Cost Fallacy

sunk_cost

“The sunk cost effect is the general tendency for people to continue an endeavor, or continue consuming or pursuing an option if they’ve invested time or money or some resource in it”

Christopher Olivola, assistant professor of marketing at Carnegie Mellon University – Tepper School of Business


In both economics and business decision-making, sunk cost refers to costs that have already happened and cannot be recovered. Sunk costs are excluded from decisions because the cost will be the same regardless of the outcome.

The sunk cost fallacy arises when decision-making takes into account sunk costs. By taking into consideration sunk costs when making a decision, irrational decision-making is exhibited.

Let go of the fear of failure. Let go of the fear of waste. By understanding that
1) things in this world change and grow
2) not all projects will succeed, we can ease our grip on the reins and slow down.

Firms that give some weight to sunk costs tend to go out of business more frequently than firms that ignore sunk costs; individuals who give some weight to sunk costs fare worse with respect to achieving their goals than individuals who differ from them in this respect. (Source: Princeton)

Published
Categorized as Blog Tagged

By Vedang R. Vatsa

IT & Management Consultant