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The sunk cost fallacy is particularly important to learn about and teach your children about. I see it everywhere, from my own decision making process to inter

The sunk cost fallacy is particularly important to learn about and teach your children about. I see it everywhere, from my own decision making process to international politics. Just this morning I was thinking about it as I read the news about the US leaving Afghanistan, and last week talking with a friend who is staying at a bad job.

mcguire 5y ago
Here's a question for you: what is the difference between the sunk cost fallacy and persistence? And here's the answer: Persistence is good when it is successful. If the activity us unsuccessful, it's an example of the irrational sunk cost fallacy. (Making decisions without knowledge of future events is quite hard.) And the important lesson: If you bail at the first sign of adversity, no one can ever accuse you of being irrational. Of course, as the old saying goes, all progress is made due to the irrational.
- clairity 5y ago
  that's not irrationality, that's decision-making under uncertainty, which is the norm, not the exception. probabilities are dynamic, information is imperfect, and so decision-making must incorporate that uncertainty. the sunk cost fallacy is simply considering existing loss when deciding on continued investment (in time, money and other resources), when you should only consider future cost for future benefit. it's thinking erroneously that existing loss is not already locked in, that it's salvageable somehow. but no, it's already lost. in a project with continuously updating probabilities of success, and under imperfect information, the go-or-no-go decision should only be based on the likelihood of future gains exceeding future losses, not future+existing losses. in this framework, persistence would be having credible evidence (e.g., non-public information), not just belief, of the likelihood of future net gain relative to opportunity cost. it'd be irrational to be persistent simply on belief rather than credible information and probability estimation.
- aidenn0 5y ago
  The difference between sunk-cost fallacy and persistence is that of motivation. If you keep doing something because "you've worked so hard already" then that's sunk-cost fallacy. If you keep doing something because "success is just around the corner" then that's persistence. You can't go back in time and not work hard on something, so whether or not you should continue is purely a function of whether or not you think you will succeed, not a function of how much effort you've already put into it.
- 542354234235 5y ago
  There is a real difference. Take the example of the “money pit” house, where the cost of repairs vastly outweighs the gain you get at the end (either in resale or in livability), vs a fixer upper house. After is working on repairs, and after significant investment time and money, you are not as far along as you thought you would be. You update your calculations on time and cost based on your progress so far and any new problems you have uncovered. A persistent person looks at the costs of a fixer upper, sees it is still likely worth doing, and is willing to put in the additional effort they had not originally planned for to see the project through. But they can also look at the future costs, recognize that the house is likely a money pit and continued work would be unlikely to ever yield a return on their investment, and that the time and money they have already spent are gone no matter what, but that they can prevent additional loss. Someone biased by the sunk cost fallacy sees both projects the same. They look at the money pit and see that it is unlikely to show a return, but they hold on to the time and money they have already spent being lost if they walk away from the project, influencing them to continue. To look at it another way, a persistent person would make the same calculation of the likely success of a project regardless if they came into it at the first point or the second point. They are persistent, so they won’t give up on something because it is more difficult than they originally thought and they won’t give up on worthwhile work just because it is hard. Someone biased by the sunk cost fallacy will not make the same calculation after they have invested effort, as they will hold on to already invested effort as a reason in and of itself to continue.

mcguire 5y ago

Here's a question for you: what is the difference between the sunk cost fallacy and persistence? And here's the answer: Persistence is good when it is successful. If the activity us unsuccessful, it's an example of the irrational sunk cost fallacy. (Making decisions without knowledge of future events is quite hard.) And the important lesson: If you bail at the first sign of adversity, no one can ever accuse you of being irrational. Of course, as the old saying goes, all progress is made due to the irrational.

clairity 5y ago
that's not irrationality, that's decision-making under uncertainty, which is the norm, not the exception. probabilities are dynamic, information is imperfect, and so decision-making must incorporate that uncertainty. the sunk cost fallacy is simply considering existing loss when deciding on continued investment (in time, money and other resources), when you should only consider future cost for future benefit. it's thinking erroneously that existing loss is not already locked in, that it's salvageable somehow. but no, it's already lost. in a project with continuously updating probabilities of success, and under imperfect information, the go-or-no-go decision should only be based on the likelihood of future gains exceeding future losses, not future+existing losses. in this framework, persistence would be having credible evidence (e.g., non-public information), not just belief, of the likelihood of future net gain relative to opportunity cost. it'd be irrational to be persistent simply on belief rather than credible information and probability estimation.
aidenn0 5y ago
The difference between sunk-cost fallacy and persistence is that of motivation. If you keep doing something because "you've worked so hard already" then that's sunk-cost fallacy. If you keep doing something because "success is just around the corner" then that's persistence. You can't go back in time and not work hard on something, so whether or not you should continue is purely a function of whether or not you think you will succeed, not a function of how much effort you've already put into it.
542354234235 5y ago
There is a real difference. Take the example of the “money pit” house, where the cost of repairs vastly outweighs the gain you get at the end (either in resale or in livability), vs a fixer upper house. After is working on repairs, and after significant investment time and money, you are not as far along as you thought you would be. You update your calculations on time and cost based on your progress so far and any new problems you have uncovered. A persistent person looks at the costs of a fixer upper, sees it is still likely worth doing, and is willing to put in the additional effort they had not originally planned for to see the project through. But they can also look at the future costs, recognize that the house is likely a money pit and continued work would be unlikely to ever yield a return on their investment, and that the time and money they have already spent are gone no matter what, but that they can prevent additional loss. Someone biased by the sunk cost fallacy sees both projects the same. They look at the money pit and see that it is unlikely to show a return, but they hold on to the time and money they have already spent being lost if they walk away from the project, influencing them to continue. To look at it another way, a persistent person would make the same calculation of the likely success of a project regardless if they came into it at the first point or the second point. They are persistent, so they won’t give up on something because it is more difficult than they originally thought and they won’t give up on worthwhile work just because it is hard. Someone biased by the sunk cost fallacy will not make the same calculation after they have invested effort, as they will hold on to already invested effort as a reason in and of itself to continue.