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I first read about this when I was a teenager, and frequently think about it when making decisions, but have never once found that being aware of it has been he

by twtw 8y ago

I first read about this when I was a teenager, and frequently think about it when making decisions, but have never once found that being aware of it has been helpful. In the face of uncertainty, you never know what is going to happen. I have never experienced a situation where I have poured money into something and it became "obvious" (for a rational agent) that i could do just as well by abandoning that previous effort. I would be very interested in hearing other's experiences.

gumby 8y ago
Very useful in business. It's tempting to agree with, "Hey, that $60M got us almost all the way there; for only 6M more we can finish!" But the real question is "Shall we spend $6M for a product that we think will generate $3M/year in years 3-5 after launch?" Or if you prefer, "We've spent two years building the test infrastructure for our legacy product, and are within a quarter of finishing. Looking forward, will we generate enough support revenue to justify investing 10 people for a quarter (plus documentation)? Or have most of our customers migrated by now?"
- Dylan16807 8y ago
  > Very useful in business. It's tempting to agree with, "Hey, that $60M got us almost all the way there; for only 6M more we can finish!" But the real question is "Shall we spend $6M for a product that we think will generate $3M/year in years 3-5 after launch?" That's such a lopsided question it's hard to try to connect it to reality, though. If the expected profit is $9M then how did you manage to spend $60M in the first place? Something huge happened that changed the picture, and makes it hard to relate as a simple "sunk cost" example.
  - gumby 8y ago
    That’s precisely the point. You might have launched that project two years ago thinking it wouldn’t take too long and would be a nice little earner for your (then) last generation product. Well instead of six months it took two years and now that legacy product is two generations old and most customers have migrated...but it’s finally almost done and you do still have some customers using it, and gosh, look we’ve already spent $60M; what a shame to throw it all away when for only a little more.... people make decisions this way all the time. These decisions also consume labor. Despite all the work put in, is it really worth finishing that refactoring or should you just abandon it all?
    - Dylan16807 8y ago
      > That’s precisely the point. No, I don't think you're getting my point. You made it such a huge gap, and not explained it, that it made me unable to properly comprehend the scenario. The psychology of sunk cost is influenced by how we got here, and you threw out such an extreme example that it overwhelmed my attempts to get into that somewhat-subtle psychology. So if you're saying that the product is already obsolete, and has lost more than 90 percent of possible revenue... that's not really a typical scenario, where you still expect to make a pile of money like in the original plan, you just need to get that last.. bit.. done. And in that scenario the sunk cost fallacy is probably not in your top ten problems either, even if you do listen to it.
BeetleB 8y ago
>I have never experienced a situation where I have poured money into something and it became "obvious" (for a rational agent) that i could do just as well by abandoning that previous effort. I think you're not understanding the fallacy. The whole point is that the amount already invested is irrelevant. It's not about whether the choice is easy or the outcomes clear. You've put in a lot of money and 3 years into a project. You're wondering "Should I quit and pursue X instead, or stick to it?" The fallacy won't tell you what to do. It is telling you that whatever you decide, the fact that you put in a lot of money and 3 years should not be a factor in deciding.

by twtw 8y ago

gumby 8y ago

Very useful in business. It's tempting to agree with, "Hey, that $60M got us almost all the way there; for only 6M more we can finish!" But the real question is "Shall we spend $6M for a product that we think will generate $3M/year in years 3-5 after launch?" Or if you prefer, "We've spent two years building the test infrastructure for our legacy product, and are within a quarter of finishing. Looking forward, will we generate enough support revenue to justify investing 10 people for a quarter (plus documentation)? Or have most of our customers migrated by now?"

Dylan16807 8y ago
> Very useful in business. It's tempting to agree with, "Hey, that $60M got us almost all the way there; for only 6M more we can finish!" But the real question is "Shall we spend $6M for a product that we think will generate $3M/year in years 3-5 after launch?" That's such a lopsided question it's hard to try to connect it to reality, though. If the expected profit is $9M then how did you manage to spend $60M in the first place? Something huge happened that changed the picture, and makes it hard to relate as a simple "sunk cost" example.
- gumby 8y ago
  That’s precisely the point. You might have launched that project two years ago thinking it wouldn’t take too long and would be a nice little earner for your (then) last generation product. Well instead of six months it took two years and now that legacy product is two generations old and most customers have migrated...but it’s finally almost done and you do still have some customers using it, and gosh, look we’ve already spent $60M; what a shame to throw it all away when for only a little more.... people make decisions this way all the time. These decisions also consume labor. Despite all the work put in, is it really worth finishing that refactoring or should you just abandon it all?
  - Dylan16807 8y ago
    > That’s precisely the point. No, I don't think you're getting my point. You made it such a huge gap, and not explained it, that it made me unable to properly comprehend the scenario. The psychology of sunk cost is influenced by how we got here, and you threw out such an extreme example that it overwhelmed my attempts to get into that somewhat-subtle psychology. So if you're saying that the product is already obsolete, and has lost more than 90 percent of possible revenue... that's not really a typical scenario, where you still expect to make a pile of money like in the original plan, you just need to get that last.. bit.. done. And in that scenario the sunk cost fallacy is probably not in your top ten problems either, even if you do listen to it.

BeetleB 8y ago

>I have never experienced a situation where I have poured money into something and it became "obvious" (for a rational agent) that i could do just as well by abandoning that previous effort. I think you're not understanding the fallacy. The whole point is that the amount already invested is irrelevant. It's not about whether the choice is easy or the outcomes clear. You've put in a lot of money and 3 years into a project. You're wondering "Should I quit and pursue X instead, or stick to it?" The fallacy won't tell you what to do. It is telling you that whatever you decide, the fact that you put in a lot of money and 3 years should not be a factor in deciding.