Sunk Cost

Sunk Cost

Robert Arp

I don’t think it would benefit either one of us to give up on this relationship yet because we've both invested so much of ourselves into it already…

Form letter, “Please Forgive Me. (This Relationship Is Worth Saving!)”

In economics, a sunk cost is an investment that can never be recovered. Prime examples include money spent on research and development or advertising for a product. However, there’s a way to think of cost in terms of time, energy, and even emotion, as is hinted at in the quotation above.

In the first few pages of his insightful article titled “The Sunk Cost ‘Fallacy’ Is Not a Fallacy,” Ryan Doody (2013) gives a rough description of the sunk cost fallacy as allowing the reality of unrecoverable costs to influence your current (or future) decision‐making about an investment in such a way that the sunk costs legitimize the investment, no matter if the investment is a good or a bad one. The general form of this fallacy looks something like this:

1. Costs have been sunk into X.
2. X is worth further investment.

Not only is there no logical connection between past unrecoverable costs and decisions about current (or future) investment, but there is also a clear “you’re fooling yourself” or “you’re rationalizing” element to the fallacy because the sunk cost itself emotionally taints rational, objective thought concerning the worth of the investment. Thus, in a certain sense, this fallacy epitomizes poor reasoning – you continue to make bad investments because you fear losing what was already invested. Doody lays out three common examples:

1. You buy a non‐refundable ticket to the opera, but you really don’t want to go on the night of the performance; yet, you go anyway reasoning that you spent money on the ticket and “it’ll be a waste of money” if you don’t go.
2. You devote many years of your life to a certain job – climbing the corporate ladder, so to speak – but now you’re unhappy with the career path; yet, you stay in that job and are miserable, figuring that you invested so much time and energy in the career and “it’ll be a waste of career investment” if you leave that career.
3. A nation allots a ton of money for its military to fight a war, loses many of its soldiers in the fight, and there’s even a general belief in the nation that the war is unwinnable; yet, the legislative body in the nation continues to allow the war to be funded.

Many would argue that this last example resonates with the United States’ commitment to the Vietnam conflict in the 1960s and 1970s and to the war in Iraq in the 2000s, where sunk costs in terms of dollars spent and lives lost were used to justify continued involvement.

The fallacy is also known as the Concorde fallacy, referring to the development of the supersonic passenger aircraft, the design of which had heating, pressurization, and structural problems, among others. The project was predicted to fail in reports of prototypes early on in the 1950s and 1960s, but after having sunk an incredible amount of money, time, and “blood, sweat, and tears” into the project, key folks involved kept pushing forward and they didn’t want to just give up. In David McRaney’s (2013) words, “their shared investment built a hefty psychological burden that outweighed their better judgments” (233). Concorde was retired in 2003.

The way to avoid this fallacy is to not allow the fear of losing what was already invested in something to influence your rational, objective decision about a present or future investment. In Eric Nielsen’s (2005) words, when making any decision, economic or otherwise, it “makes no sense to factor in sunk costs precisely because they are sunk; no present action can change them. No matter what happens, the sunk costs are always there.”