This model is a reminder to cut your losses and focus on future opportunities rather than getting pulled down by past decisions.
Sunk Cost refers to money or resources that have been spent without any possibility of recovering them. Falling victim to the Sunk Cost Fallacy involves basing future decisions on past lost investments rather than on potential future opportunities.
INTERRUPTING THE FALLACY.
It might involve continuing to invest in a project because you have already invested large amounts of resources and do not want to “lose the investment”. In simple terms, it’s known as ‘throwing good money after bad’.
Interrupting the sunk cost fallacy involves ignoring past sunk costs and making decisions based on relevant future costs and opportunities only.
IN YOUR LATTICEWORK.
Sunk Cost and it's associated fallacy is an unconscious bias usually referenced in accounting and financial domains but are applied much more broadly in decision making and other contexts.
It links to Cost-Benefits Analysis as you consider the pros and cons of a choice; and to Opportunity Cost to consider the potential relative loss of your next choice.
A particularly useful model to help you interrupt the Sunk Cost Fallacy is Temporal Landmarks and the related Fresh Start Effect.
- Ask, ‘does this cost have an impact on what will happen in the future?’
Identify Sunk Costs by considering whether it can be recovered and whether it is independent of future events. Once identified, work to put them aside and base decisions on future costs and consequences only.
- ‘Cut your losses’.
Past decisions and investments have a momentum that is hard to break from, even if they were mistakes. Cutting your losses and starting fresh means using those investments as lessons rather than as a model for future action.
- Use the Fresh Start Effect.
Leverage Temporal Landmarks and the impact they have by starting anew on significant dates or after key events. This might include the beginning of the year, a month, or even a week. It can even just involve going to bed and starting afresh the next day to avoid Sunk Costs.
Identifying a Sunk Cost can be difficult when there is no precise way of comparing a loss to a gain. The desire to not appear wasteful also can limit your ability to base a decision on relevant costs exclusively, especially when you feel personally responsible for the investments representing sunk costs.
The Concorde Fallacy.
The Concorde Fallacy is an alternative name for the sunk cost fallacy, coming from the way the British and French governments continued to co-fund the development of the expensive Concorde supersonic aeroplane even after it became financially untenable. Their previous investment, financially and politically, was thought to determine the ongoing funding.
Eat too much?
A common example of the sunk cost fallacy is when someone buys a large meal, then overeats to ensure ‘they get their money worth’.
The sunk cost fallacy is an unconscious bias that arises from accounting and financial domains. It is an important consideration in decision making.
Use the following examples of connected and complementary models to weave the sunk cost fallacy into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above.
- Cost-benefit analysis: to consider actual pros and cons of a choice
- Opportunity cost: to consider the potential loss of a future facing decision.
- First principle thinking: in breaking down a situation to its basics.
- Inversion: considering the opposite, e.g. ‘how can we continue to make that loss again?’
- The Lindy effect: to challenge sunk costs and seeing past longevity as a potential positive.
- Availability heuristic: being overly impacted by immediate situations and losses.
- Lock-in effect: is there greater friction to breaking from the status quo.
Read N. Gregory Mankiw’s Principles of economics for information on various economic theories that involve the concept of sunk costs.
This brief article references some of the relevant studies arising from Behaviorual Economics and the Sunk Cost fallacy. Check this video resource for a quick overview of the sunk cost concept and how it applies to the Concorde supersonic plane case.
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