The concept of a sunk cost comes from economics, but the sunk cost fallacy shows that we all have an intuition of what it means. It’s odd, then, that whereas decisions made in the business world (at least those made by successful businesses) tend to be soberer, we so often allow fear and guilt to impose on the decisions we make in our personal lives. A sunk cost is one that has already been paid and is impossible to recover. We commit the sunk cost fallacy when we remain committed to the course of action associated with the cost simply to avoid having wasted whatever we have already invested.
For example, you may the first hundred pages of a book and realize that you don’t like the book and are gaining nothing from it. Then, you might commit the sunk cost fallacy and continue reading the book so as not to waste the time you’ve already spent reading it. If you are actually gaining nothing from the book, it would seem that to continue reading the book is only furthering the waste. So, this reasoning is fallacious.
We are not as rational as we think.
Likely because we are all guilty of committing this fallacy at some point, it can be uncomfortable and even depressing to think about. The crux of the issue is that it’s difficult to tell when one is committing the fallacy. When we commit the fallacy, we are always trying to toe the line between not behaving rashly and behaving too conservatively; we commit the fallacy when we do the latter.
As one (irretrievably) invests in a decision and nears the payout of that investment, and as the remaining cost to invest in that course of action thereby decreases, the investment would appear to become more attractive, assuming the reward for that investment does not diminish in value. The problem is that the things we desire inevitably change in value to us as our desires and circumstances change.
We cannot manage our lives as if they were businesses; there is no tangible metric to serve for us the role that profit serves for business. The sunk cost fallacy feigns to establish such a metric and thereby assumes that the reward for an investment retains the value that it had in the past when it seemed more desirable; in reality it may indeed lose its value if one’s desires or circumstances change. So, my first piece of advice is not to pretend that value in our personal lives is as concrete as value in pure economics.
We are never fully invested.
My other point is that one does not invest fully in a course of action until it comes to fruition. Until one actually reaps the benefits of an investment, he or she has not fully invested in it because there is time or effort or some other resource that he still has to invest in order to get any value back.
For example, if you are pursuing a particular career and realize that it is not actually what you want, you might make the sunk cost fallacy by continuing to pursue it so as not to waste the time, effort, and money you have already invested in the prospect. This is a mistake if your resources would be better spent pursuing a different goal. However, if you haven’t gotten the job, then you haven’t actually made the full investment necessary because of the additional time and effort that are necessary to move forward. It would not be surprising for your rational faculties to tell you that you have to continue to pursue the career because it once seemed very valuable.
To be clear, my point here is not that one should necessarily abandon such a pursuit, but that fear of a sunk cost is a fallacious reason to persist. Because a career is an economic decision, a part of the benefit is tangible, but much of it is not, insofar as it relates to personal interests and desires. Still, the fallacy is a bad reason to make such a decision and one that we cannot consistently employ.
Again, the difficulty with the sunk cost fallacy is not that we are unaware of it, but that it is generally problematic in situations wherein it is difficult to distinguish the fallacy from rational deliberation. However, I think we can benefit from thinking critically about it and learning to identify the fallacy more accurately.