Sunk Cost Fallacy
We irrationally continue investments because of past costs that cannot be recovered.
Origin & History
The Sunk Cost Fallacy was formally described by economists Arkes and Blumer in a 1985 paper demonstrating that people change their behavior based on irrecoverable past investments. Classical economics holds that sunk costs — costs already incurred and unrecoverable — should be irrelevant to future decisions. The fallacy is that they aren't: people continue losing strategies, bad relationships, and failing projects because of what they've already put in, not because of future expected return.
Real-World Examples
A couple pays $180 for concert tickets and feels too tired to enjoy the show. They go anyway — 'we already paid for it' — and have a miserable time. A friend who got free tickets stayed home when tired. The cost was sunk either way.
Organizations continue funding failing projects beyond rational justification because acknowledging failure means accepting that the previous investment was wasted. The investment grows, the hole deepens.
People stay in unfulfilling relationships because of how long they've been together — 'we've invested 5 years' — even when future prospects are poor. The 5 years are gone regardless of what happens next.
Why It Matters
The Sunk Cost Fallacy is maintained by loss aversion: our desire to 'get our money's worth' is really a desire to avoid feeling that past investment was wasted. The correct decision framework ignores sunk costs entirely and asks only: 'Given where I am now, what decision maximizes expected future value?' A useful prompt: 'If I hadn't already invested X, and I were making this decision fresh today, what would I choose?' If the answer differs from your current behavior, the fallacy may be operating.
Related Laws
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The irrational tendency to continue an investment — of money, time, or effort — because of past costs that are already incurred and cannot be recovered, rather than on expected future returns.
Ask: 'If I were making this decision fresh today, with no prior investment, what would I choose?' If the answer differs from your current behavior, the fallacy may be driving you.
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