How Susceptible Are You to the Sunk Cost Fallacy?
Many managers are susceptible to the famous sunk cost effect, whereby they persist investing in a money-losing project even when it makes sense to invest the new money in alternative new projects. The research-based tool presented in this article enables managers to measure that susceptibility.
Have you continued with a project long after you should have abandoned it? Persevered with a relationship even after the point of no return? Dragged yourself to an event in miserable weather just because you already bought the ticket with your hard-earned cash? These are all examples of the “sunk cost effect,” which occurs when someone chooses to do or continue something just because they have invested (unrecoverable) resources in it in the past.
The effect is often attributed to well-known high-stakes decisions across various contexts. For example, the management at General Motors’ reluctance to move away from once-winning strategies is said to have contributed to the firm’s decline late in the last century. In aviation, throwing good money after bad is generally considered to have led to the massive investment by the British and French governments in the Concorde project (indeed, the sunk cost effect is still sometimes referred to as the Concorde Fallacy). And in the political sphere, examples such as the prolonged U.S. military campaigns in Vietnam and Iraq suggest that the effect can lead not only to financial ruin, but also to the loss of tens of thousands of lives.
It is a core lesson in many business economics or decision-making classes that any unrecoverable costs sunk in the past are irrelevant when deciding what to do next. Decision-makers need to remember: when sunk costs affect strategic decisions, there can be real and dire consequences.
