On Sunk Cost Fallacies

I already started, so I might as well keep going

More often than not, we find ourselves uttering those words. From a long question on a test, to boring movies, and our university degrees, the more time we spend on them, the more we feel we the urge to finish them–so that it was not all in vain.

This is the typical example of a sunk cost fallacy, a situation in which we “follow through an endeavor” if we’ve already invested on it (without considering if benefits outweigh costs). To better comprehend this type of fallacy, it’s important to understand that sunk costs are those that can no longer be recovered. Examples of this costs include time, money, and effort.

To avoid falling into the trap of the sunk cost fallacies, it’s essential to acknowledge that we, as human beings, suffer from irrational escalation of commitment–or an unexplainable commitment to our initial choices/behavior, even when being confronted by an adverse environment. Ultimately, the solution is to act as rational economic agents. This means that whenever we make decisions, we should aim to make them based not on our past attitude and actions in relation to the situation, but on the current conditions: if the benefits outweigh the downsides, we should go ahead with it.

A perfect example is one featuring the production of a film that I was presented in a recent economics lecture. The example explained that if a movie is being produced, and $70 million are spent on a set that ends up literally sinking, the choice to continue making the movie should not be based on the fact that $70 million have already been invested on it. On the contrary, the decision should be based on whether the forecast revenue is higher than the additional money required to finish producing the film–if the expected revenue is more than the additional costs, then the production should be continued.

In other words, it does not matter if you’ve spent your entire freshman year taking Biology courses that you hate, a whole month watching a terrible TV show, or all of your income on a girl you don’t love... if you’re not happy (and the benefits outweigh the costs), don’t feel afraid to embrace change!

Sources: Decision Lab