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Subheading: Logic or Emotions?

The sunk cost fallacy is a phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it (eg. time, money, effort), even when it is apparent that abandonment would be more beneficial. It is a type of financial mistake that occurs when a person believes that they are making the best decision by investing in something that they already know is not the best option. This often means that they are going against clear, incontestable evidence and make extremely irrational decisions because they factor in influences rather than current alternatives. As people invest more time, money or energy in such endeavours, their heightened purpose and continued commitment creates a vicious and often destructive cycle, leading to suboptimal outcomes.

Imagine letting unworn clothes remain in your closet because they were expensive to buy, attempting to complete fruitless tasks because of the energy you have already invested in them, or attending a concert despite being sick because you have already bought a ticket for it. On a personal level, imagine staying with a partner despite your unhappiness merely because of the time you have already devoted to the relationship. These are all examples of the sunk cost fallacy and how it affects our daily lives in extensive or inconspicuous ways.

The concept of a sunk cost fallacy was first introduced by Richard Thaler, a pioneer of behavioural science. He believed that, ‘paying for the right to use a good or service will increase the rate at which the good will be utilised.’ In economic terms, a sunk cost fallacy is a cost that cannot be recovered.

Hal Arkes and Catherine Blumer wished to examine the sunk cost effect in practice to expand Thaler’s definition beyond its purely monetary framework. The two psychologists redefined the term as ‘a greater tendency to continue an endeavour once an investment in money, effort, or time has been made.’

Arkes and Blumer conducted several experiments to prove that people were influenced by the sunk cost fallacy in their day-to-day decision making. For instance, a questionnaire study was conducted to test the participants' thoughts on spending $100 on a trip to Michigan and then $50 on a trip to Wisconsin. The participants were then asked to imagine spending the first $100 on a ski trip and the latter $50 on a trip to Wisconsin. The participants were then told that the trip to Michigan would be more enjoyable if they could return the tickets. The majority of them went on the Michigan trip, even though the costs would be lost.`

Arkes and Blumer conducted several more experiments to understand if the sunk cost fallacy was apparent in real life situations and not just hypothetical questionnaires. These experiments proved to be successful as well, which led to the popularisation of the sunk cost fallacy theory.

Systematic effects

The sunk cost fallacy not only has an impact on small day-to-day decisions but has also been proven to impact the decisions that governments and companies make.

An infamous example of the sunk cost fallacy impacting large-scale decisions was eventually named the Concorde fallacy. In 1956, the French and

British governments were involved in a project to build a supersonic aircraft,

the Concorde, which was estimated to cost almost 100 million dollars. But while

the project was ongoing, it was clear that the financial gains of the plane would not offset them. Despite that discovery, the project

continued as the manufactures and governments had already made significant financial investments and dedicated a lot of time to the project. This is the clearest indicator of how the sunk cost fallacy is a cognitive fallacy that states that the costs of a project will never be recovered even if it is abandoned. This is very common in governments as they often use tax-payers' money for projects. It can lead to waste of resources and negatively affect the lives of everyone involved.

Why does it happen ?

The sunk cost fallacy occurs because humans are not purely rational decision-makers and are regularly influenced by our emotions. It could be an unpredictable knee-jerk reaction, an attempt to convince ourselves that we are not careless and wasteful, or an effort to correct our cognitive dissonance and bridge the mental disconnect between paying for something and not receiving the expected return.

The concept of commitment bias is related to the belief that we should continue supporting past decisions even though there is evidence that they are not the best option. The belief that we should make decisions based on the past costs instead of the future benefits and costs is referred to as the sunk cost fallacy. It can also be caused by loss aversion, a term used to describe the fact that the impact of losses feels much worse to us than the impact of gains. We are more likely to avoid losses than seek out potential gains.

How to avoid falling into its trap:

It can be hard to ignore our emotions, especially when they have a powerful impact on our decisions. Being aware of the sunk cost dilemma can help us avoid falling into it. We can focus on the present and future rather than past commitments if we are aware of them.

We should focus on concrete actions rather than dwelling and succumbing to our feelings of wastefulness or guilt, as studies have proven that we are deterred from making logical decisions based on our emotions. Once this is normalised in our lives the effects of the sunk cost fallacy will be automatically reduced.

We can also turn to technology to help us make decisions. Information technology systems make rational choices and are not impacted by the chain of human decisions that came before it.

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