12 ms·

The Sunk Cost Fallacy

73 points by zameermfm 5y ago

ChrisMarshallNY 5y ago
There are many, many corporations that rely on this (Many “cost plus” government contractors, for example). A common pattern, is a deliberate underbid, in order to lock in the contract, then a series of additional charges, as the project progresses. A contractor tried this recently, on a friend of mine. Luckily, he consulted me, and I was able to help him to steer clear of that tar pit. The 419 scam works the same way.
- potatoman22 5y ago
  Cerner and the VA
- antasvara 5y ago
  That's not necessarily a sunk cost fallacy (at least as I understand it). If I add additional charges, the smart thing to do isn't necessarily to fire that contractor. This is because firing them, then hiring a new contractor to finish the job, is possibly more expensive than paying the charges. Asking for more bids, choosing a new contractor, then getting them up to speed can be costly. The rational thing to do would be to weigh your options at that point. Do I believe that a new contractor can get up to speed and finish the project with a smaller budget than the current team?
HPsquared 5y ago
How things should be done: Value (to the customer) > Price (sale price) > Cost (to the seller). What's needed is value (which is subjective), not necessarily cost.
wombatmobile 5y ago
It’s easy to see the irrationality of the sunken cost fallacy when all the inputs and outputs can be quantified exactly and completely. Real life is often not as clear. We don’t know whether our costs are sunk or not. Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell. Should Vincent Van Gogh have stopped painting and studied a trade or a profession that would at least pay a living wage? Should his brother Theo have kept supporting him? It depends on when you do the reckoning. In Van Gogh’s case, the Art was never worth anything during his whole lifetime. How much did Steve Jobs blow on NeXT? On Pixar? On the Newton? It depends on when you do the reckoning, and it depends on what’s coming around the corner. The only thing we know for sure is that quitters don’t win the long games.
- redm 5y ago
  The sunk cost fallacy only applies when you can see the likely outcome is no longer beneficial and continue anyway. “ Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell.” This is not a sunk cost fallacy. You need to make a follow through even though you know its a loosing proposition. The training is a sunk cost, but the fallacy is making a decision based on that sunk cost.
  - Ma8ee 5y ago
    Isn't the notion that you have to follow through a prime example of the sunk cost fallacy?
- Cederfjard 5y ago
  All costs are always ”sunk”. The fallacy is to think that just because you’ve spent a lot of money, time, or effort, that that in itself warrants that you continue. In your athlete example, as long as she makes her decision based on risk and reward in the future, then that has nothing to do with sunk costs. If however she thought that her outlook as an athlete was bleak, but figured ”I’ve already dedicated seven years to this, might as well continue” - that would be the sunk cost fallacy.
  - yobbo 5y ago
    One argument is that the total revenue of Concorde did not cover its total costs, therefore the program should have been cancelled. But it's more subtle. One interpretation is that past costs don't matter, therefore decisions should be based on expected value of further investments. In a slightly round-about way, more "sunk costs" means higher leverage on future investments. Whether it's a fallacy depends on high well you can estimate the future expected value, and how it depends on the current state.
    - listenallyall 5y ago
      Actually, understanding sunk costs may have saved the Concorde rather than killing it. I'm using entirely made up numbers just as an example -- let's say that halfway through development, new estimates of total project costs were $1 billion and total revenue was only projected to be $750 million. Shut it down? Nope, because the first half-billion has already been spent. At this point, the options are to stop and get zero, or spend the second half-billion to see a 750m return. So work continues.
dcanelhas 5y ago
I find the example in the article a bit strange regarding the concert. Wouldn't going to the concert in a sense "recover" the $50 if you valued the experience of going to the concert at $50 or more?
- redm 5y ago
  They provide several other articles for additional context, such as the Concorde.
  - redis_mlc 5y ago
    The article is literally trash. Other people have mentioned the poor concert ticket example. But the Concorde example is equally bad. The Concorde project started as an exploration between Boeing and European partners. Boeing didn't believe in any of the assumptions, including primacy of hub and spoke, so pulled out. The British did later threaten to pull out of the project over costs, but the French threatened everything short of war. So the British continued for reasons of diplomacy. There was the additional benefit of European technology development, likely resulting in Airbus. How bad was the Concorde project? The British and French not only had separate management and test teams, but also separate assembly lines. The British test pilot said the two teams barely talked to each other, with the French being rigid and standoffish. https://www.airbus.com/newsroom/stories/concorde-day.html https://www.airbus.com/newsroom/stories/concorde-day.html
- Hokusai 5y ago
  No, you don't get the money back. In theory you should act as if you got the tickets for free. You are going because you find the concert interesting, you do not go because you have already spend $50. Also you take into account future costs. If you want to go to the concert and there are several days that you can go, you choose to go to the one that you already have tickets. Attending any other day will cost you $50. Another cost is the social consequences. Maybe you do not want to go anymore, but you know that your mother will be pissed off after she gave you the money. Or you may be judged as irresponsible by your friends if you don't go. That you paid in the past do not matter anymore. But are there future consequences what you need to worry about.
hitpointdrew 5y ago
>The Sunk Cost Fallacy Every company that has ever implemented SAP.
vincentmarle 5y ago
Sunk cost fallacy is economics 101, yet most people I know (including business-savy people) have not seem to have heard about it or fail to recognize it when it affects their decisions.
pontus 5y ago
It's also worth noting that sunk cost is often strongly correlated with remaining cost. If you've spent 4 years in a 5 year PhD program and start questioning your reasons for being there, you could frame it in terms of the sunk cost fallacy: "just because I've been here for four years, doesn't mean that I should continue on". On the other hand, there's a rational argument for staying: "at this point I only have one more year to go and if I leave now I leave empty handed but if I just stay one more year, I'll get a PhD".
- samuel 5y ago
  If I understand correctly the sunk cost fallacy your example lacks an objectively better alternative, like an opportunity related to one of your hobbies, unrelated to your studies, which could land you in a great job in some years. As you stated it, there's no doubt, staying in the PhD is the only rational choice.
watwut 5y ago
The people in that situation go to concert, because they really really want to see concert and have fun. Most concerts happen only once then you have to wait a year for another chance.
- djmips 5y ago
  Or once in a lifetime in some cases.
jefffoster 5y ago
There's also a positive framing for the sunk cost fallacy. Invest your money in something (e.g. exercise equipment) and you'll be more willing to spend time using it.
flerchin 5y ago
If the cost to complete a project divided by its expected annual revenue is more than the P/E ratio of your stock, you're in a sunk-cost fallacy.
anovikov 5y ago
Some of the examples here strike me as wrong. For example: being forced between a $100 trip and a $50 trip, both of which are prepaid, if both can't be done because they are on same day. It's not a fallacy at all to choose the $100 one - even if we are not sure in which way exactly, we are still living in a free market so if the cost was 2x without any beneficial differences, it wouldn't sustain itself - so that trip is likely to be better in some way. Not dropping out of a paid program with a lower success rate in favour of a free one with a higher success rate is a good thing: it very likely means that a free one is a cheap, bs thing that gives no real knowledge (certainly they won't teach you better for free, so if the pass rate is higher it only means that exams are simpler to please everyone). Plus, some time is already lost on the paid program, and time is money.
- HarHarVeryFunny 5y ago
  The ski trip one does seem bogus. The person obviously wanted to go on both trips since they bought tickets for both. Unless something has changed and they no longer want to go on the $100 trip in the future, then it makes sense to go on that one now to reduce future costs (spend $100 in future vs spend $50 on other trip in future). Whether they enjoy the $50 trip more than the $100 one, or think they may do, is irrelevant if they still want to experience both (as one can assume by their having bought tickets for both).
JoeAltmaier 5y ago
Lots of very different strawman situations are being described. Sure if you've built expertise and experience in an area of effort (athlete; scholar) then you have to balance that against the cost of starting over somewhere else. But if you have only spent time and money, and have nothing to show for it? Then 'sunk cost' is indeed a fallacy. Nothing to see here folks; move along.
dukeofdoom 5y ago
The Sunk Cost Fallacy is why we are still doing the lockdowns.
- cyounkins 5y ago
  Can you elaborate?
  - djmips 5y ago
    Their grotesque implication is that older and vulnerable people who could die of Covid is a sunk cost?
    - dukeofdoom 5y ago
      You know after the first 2 vaccines didn't stop COVID. I'm sure a third one will do it. Keep destroying businesses and lives for the next decade, because you've already travelled so far down this path. Zero self reflection. Young people committing suicide due to the lockdowns don't matter.
recursivedoubts 5y ago
The sunk cost fallacy fallacy: we have perfect knowledge, particularly of domains we haven't poured a lot of time into, and therefore can, with certainty, act perfectly rational at all times.
xivzgrev 5y ago
Honest question - in the concert ticket example, the article said that “ $50 spent on concert tickets..should not be a factor in our current decision-making” (because it’s irrecoverable). But what if you are still interested in this show? If you choose not to go today, then you would need to purchase another $50 ticket in the future, thus increasing your total investment to $100. But if you go today, despite being sick, your investment would only be $50. So the $50 already spent could be a logical input into your future decision making…assuming you still want to go, and are evaluating a second purchase or not Is this still sunk cost fallacy?
- Jtsummers 5y ago
  The fallacy is going because of the resources (whatever they may be) spent, not considering (or fairly weighting) other considerations. If you think the concert is going to be sufficiently enjoyable (or unique, last concert by your favorite band) to go to despite being sick, having to deal with frustrating traffic, and likely getting sicker because of going, then go. But don't go because you spent $50 just to end up laid up in bed for a week after and never enjoying the concert because your sinuses were so stuffed up you couldn't even hear it.
  - djmips 5y ago
    It's important for a good analogy to have these bases covered.
    - Jtsummers 5y ago
      It's not an analogy, it's an example. And everything I listed in my comment came from the article: > On the day of the concert, you feel sick and it’s raining outside. You know that traffic will be worse because of the rain and that you risk getting sicker by going to the concert. So they did cover those elements. The point of the article is to discuss the sunk cost fallacy, which they did. The fallacy is choosing to go to the concert because you spent the $50 on the ticket, disregarding the other considerations or weighing them below the sunk cost in importance. If you go despite the issues they mention but because you think it's going to be worth it (in enjoyment, uniqueness, whatever) then you've made a decision that wasn't based on the fallacy. Which is what they discuss in the article.
GatorD42 5y ago
Gwern had the ultimate take down of the sunk cost fallacy. https://www.gwern.net/Sunk-cost https://www.gwern.net/Sunk-cost Outside of specific (usually government) projects, I tend to think of it as the sunk cost fallacy fallacy.
pavlov 5y ago
The ultimate expression of sunk cost fallacy is Bitcoin (and Proof-of-Work in general). “We burned so much coal generating random numbers, it has to be worth a lot. Let’s spend even more.” Aliens visiting Earth would have a great laugh at our sense of priorities.
29athrowaway 5y ago
"We have so many lines of COBOL, we have to keep investing in COBOL"

73 points by zameermfm 5y ago

There are many, many corporations that rely on this (Many “cost plus” government contractors, for example). A common pattern, is a deliberate underbid, in order to lock in the contract, then a series of additional charges, as the project progresses. A contractor tried this recently, on a friend of mine. Luckily, he consulted me, and I was able to help him to steer clear of that tar pit. The 419 scam works the same way.

potatoman22 5y ago
Cerner and the VA
antasvara 5y ago
That's not necessarily a sunk cost fallacy (at least as I understand it). If I add additional charges, the smart thing to do isn't necessarily to fire that contractor. This is because firing them, then hiring a new contractor to finish the job, is possibly more expensive than paying the charges. Asking for more bids, choosing a new contractor, then getting them up to speed can be costly. The rational thing to do would be to weigh your options at that point. Do I believe that a new contractor can get up to speed and finish the project with a smaller budget than the current team?

HPsquared 5y ago

How things should be done: Value (to the customer) > Price (sale price) > Cost (to the seller). What's needed is value (which is subjective), not necessarily cost.

wombatmobile 5y ago

It’s easy to see the irrationality of the sunken cost fallacy when all the inputs and outputs can be quantified exactly and completely. Real life is often not as clear. We don’t know whether our costs are sunk or not. Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell. Should Vincent Van Gogh have stopped painting and studied a trade or a profession that would at least pay a living wage? Should his brother Theo have kept supporting him? It depends on when you do the reckoning. In Van Gogh’s case, the Art was never worth anything during his whole lifetime. How much did Steve Jobs blow on NeXT? On Pixar? On the Newton? It depends on when you do the reckoning, and it depends on what’s coming around the corner. The only thing we know for sure is that quitters don’t win the long games.

redm 5y ago
The sunk cost fallacy only applies when you can see the likely outcome is no longer beneficial and continue anyway. “ Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell.” This is not a sunk cost fallacy. You need to make a follow through even though you know its a loosing proposition. The training is a sunk cost, but the fallacy is making a decision based on that sunk cost.
- Ma8ee 5y ago
  Isn't the notion that you have to follow through a prime example of the sunk cost fallacy?
Cederfjard 5y ago
All costs are always ”sunk”. The fallacy is to think that just because you’ve spent a lot of money, time, or effort, that that in itself warrants that you continue. In your athlete example, as long as she makes her decision based on risk and reward in the future, then that has nothing to do with sunk costs. If however she thought that her outlook as an athlete was bleak, but figured ”I’ve already dedicated seven years to this, might as well continue” - that would be the sunk cost fallacy.
- yobbo 5y ago
  One argument is that the total revenue of Concorde did not cover its total costs, therefore the program should have been cancelled. But it's more subtle. One interpretation is that past costs don't matter, therefore decisions should be based on expected value of further investments. In a slightly round-about way, more "sunk costs" means higher leverage on future investments. Whether it's a fallacy depends on high well you can estimate the future expected value, and how it depends on the current state.
  - listenallyall 5y ago
    Actually, understanding sunk costs may have saved the Concorde rather than killing it. I'm using entirely made up numbers just as an example -- let's say that halfway through development, new estimates of total project costs were $1 billion and total revenue was only projected to be $750 million. Shut it down? Nope, because the first half-billion has already been spent. At this point, the options are to stop and get zero, or spend the second half-billion to see a 750m return. So work continues.

dcanelhas 5y ago

I find the example in the article a bit strange regarding the concert. Wouldn't going to the concert in a sense "recover" the $50 if you valued the experience of going to the concert at $50 or more?

redm 5y ago
They provide several other articles for additional context, such as the Concorde.
- redis_mlc 5y ago
  The article is literally trash. Other people have mentioned the poor concert ticket example. But the Concorde example is equally bad. The Concorde project started as an exploration between Boeing and European partners. Boeing didn't believe in any of the assumptions, including primacy of hub and spoke, so pulled out. The British did later threaten to pull out of the project over costs, but the French threatened everything short of war. So the British continued for reasons of diplomacy. There was the additional benefit of European technology development, likely resulting in Airbus. How bad was the Concorde project? The British and French not only had separate management and test teams, but also separate assembly lines. The British test pilot said the two teams barely talked to each other, with the French being rigid and standoffish. https://www.airbus.com/newsroom/stories/concorde-day.html https://www.airbus.com/newsroom/stories/concorde-day.html
Hokusai 5y ago
No, you don't get the money back. In theory you should act as if you got the tickets for free. You are going because you find the concert interesting, you do not go because you have already spend $50. Also you take into account future costs. If you want to go to the concert and there are several days that you can go, you choose to go to the one that you already have tickets. Attending any other day will cost you $50. Another cost is the social consequences. Maybe you do not want to go anymore, but you know that your mother will be pissed off after she gave you the money. Or you may be judged as irresponsible by your friends if you don't go. That you paid in the past do not matter anymore. But are there future consequences what you need to worry about.

hitpointdrew 5y ago

>The Sunk Cost Fallacy Every company that has ever implemented SAP.

vincentmarle 5y ago

Sunk cost fallacy is economics 101, yet most people I know (including business-savy people) have not seem to have heard about it or fail to recognize it when it affects their decisions.

pontus 5y ago

It's also worth noting that sunk cost is often strongly correlated with remaining cost. If you've spent 4 years in a 5 year PhD program and start questioning your reasons for being there, you could frame it in terms of the sunk cost fallacy: "just because I've been here for four years, doesn't mean that I should continue on". On the other hand, there's a rational argument for staying: "at this point I only have one more year to go and if I leave now I leave empty handed but if I just stay one more year, I'll get a PhD".

samuel 5y ago
If I understand correctly the sunk cost fallacy your example lacks an objectively better alternative, like an opportunity related to one of your hobbies, unrelated to your studies, which could land you in a great job in some years. As you stated it, there's no doubt, staying in the PhD is the only rational choice.

watwut 5y ago

The people in that situation go to concert, because they really really want to see concert and have fun. Most concerts happen only once then you have to wait a year for another chance.

djmips 5y ago
Or once in a lifetime in some cases.

jefffoster 5y ago

There's also a positive framing for the sunk cost fallacy. Invest your money in something (e.g. exercise equipment) and you'll be more willing to spend time using it.

flerchin 5y ago

If the cost to complete a project divided by its expected annual revenue is more than the P/E ratio of your stock, you're in a sunk-cost fallacy.

anovikov 5y ago

Some of the examples here strike me as wrong. For example: being forced between a $100 trip and a $50 trip, both of which are prepaid, if both can't be done because they are on same day. It's not a fallacy at all to choose the $100 one - even if we are not sure in which way exactly, we are still living in a free market so if the cost was 2x without any beneficial differences, it wouldn't sustain itself - so that trip is likely to be better in some way. Not dropping out of a paid program with a lower success rate in favour of a free one with a higher success rate is a good thing: it very likely means that a free one is a cheap, bs thing that gives no real knowledge (certainly they won't teach you better for free, so if the pass rate is higher it only means that exams are simpler to please everyone). Plus, some time is already lost on the paid program, and time is money.

HarHarVeryFunny 5y ago
The ski trip one does seem bogus. The person obviously wanted to go on both trips since they bought tickets for both. Unless something has changed and they no longer want to go on the $100 trip in the future, then it makes sense to go on that one now to reduce future costs (spend $100 in future vs spend $50 on other trip in future). Whether they enjoy the $50 trip more than the $100 one, or think they may do, is irrelevant if they still want to experience both (as one can assume by their having bought tickets for both).

JoeAltmaier 5y ago

Lots of very different strawman situations are being described. Sure if you've built expertise and experience in an area of effort (athlete; scholar) then you have to balance that against the cost of starting over somewhere else. But if you have only spent time and money, and have nothing to show for it? Then 'sunk cost' is indeed a fallacy. Nothing to see here folks; move along.

dukeofdoom 5y ago

The Sunk Cost Fallacy is why we are still doing the lockdowns.

cyounkins 5y ago
Can you elaborate?
- djmips 5y ago
  Their grotesque implication is that older and vulnerable people who could die of Covid is a sunk cost?
  - dukeofdoom 5y ago
    You know after the first 2 vaccines didn't stop COVID. I'm sure a third one will do it. Keep destroying businesses and lives for the next decade, because you've already travelled so far down this path. Zero self reflection. Young people committing suicide due to the lockdowns don't matter.

recursivedoubts 5y ago

The sunk cost fallacy fallacy: we have perfect knowledge, particularly of domains we haven't poured a lot of time into, and therefore can, with certainty, act perfectly rational at all times.

xivzgrev 5y ago

Honest question - in the concert ticket example, the article said that “ $50 spent on concert tickets..should not be a factor in our current decision-making” (because it’s irrecoverable). But what if you are still interested in this show? If you choose not to go today, then you would need to purchase another $50 ticket in the future, thus increasing your total investment to $100. But if you go today, despite being sick, your investment would only be $50. So the $50 already spent could be a logical input into your future decision making…assuming you still want to go, and are evaluating a second purchase or not Is this still sunk cost fallacy?

Jtsummers 5y ago
The fallacy is going because of the resources (whatever they may be) spent, not considering (or fairly weighting) other considerations. If you think the concert is going to be sufficiently enjoyable (or unique, last concert by your favorite band) to go to despite being sick, having to deal with frustrating traffic, and likely getting sicker because of going, then go. But don't go because you spent $50 just to end up laid up in bed for a week after and never enjoying the concert because your sinuses were so stuffed up you couldn't even hear it.
- djmips 5y ago
  It's important for a good analogy to have these bases covered.
  - Jtsummers 5y ago
    It's not an analogy, it's an example. And everything I listed in my comment came from the article: > On the day of the concert, you feel sick and it’s raining outside. You know that traffic will be worse because of the rain and that you risk getting sicker by going to the concert. So they did cover those elements. The point of the article is to discuss the sunk cost fallacy, which they did. The fallacy is choosing to go to the concert because you spent the $50 on the ticket, disregarding the other considerations or weighing them below the sunk cost in importance. If you go despite the issues they mention but because you think it's going to be worth it (in enjoyment, uniqueness, whatever) then you've made a decision that wasn't based on the fallacy. Which is what they discuss in the article.

GatorD42 5y ago

Gwern had the ultimate take down of the sunk cost fallacy. https://www.gwern.net/Sunk-cost https://www.gwern.net/Sunk-cost Outside of specific (usually government) projects, I tend to think of it as the sunk cost fallacy fallacy.

pavlov 5y ago

The ultimate expression of sunk cost fallacy is Bitcoin (and Proof-of-Work in general). “We burned so much coal generating random numbers, it has to be worth a lot. Let’s spend even more.” Aliens visiting Earth would have a great laugh at our sense of priorities.

29athrowaway 5y ago

"We have so many lines of COBOL, we have to keep investing in COBOL"