A complete guide to the sunk cost fallacy (with definition)

By Indeed Editorial Team

Published 20 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Economics is all about allocating resources in the most efficient way possible, from a household buying goods to a government investing in policies. Some mistakes in allocation are consistent, such as the sunk cost fallacy. Understanding the fallacy is an opportunity to avoid the fallacy yourself and make the most of a company's resources. In this article, we discuss what the sunk cost fallacy is, explain why it occurs, explore examples of the fallacy and review some steps you can take to avert this paradox.

What is the sunk cost fallacy?

The sunk cost fallacy, or the Concorde fallacy, describes the human tendency to follow an endeavour to the end after investing time, effort, money and other resources into it. The fallacy occurs when the cost of the resources and time exceeds the benefit of completing the endeavour. All organisations have sunk costs, such as the rent the business pays on a property and the investments a business makes. Recognising these costs and understanding the fallacy is a necessity for balancing investment with stopping projects that cost more than they're worth.

The alternative term for the fallacy, Concorde fallacy, comes from the Concorde project between the French and British governments. Both parties continued providing funding for the aircraft long after the economic case for supersonic flight disappeared. With the increasing monetary, resource-based and emotional costs, the governments stopped funding the project long after making a significant loss. Recognising the paradox early prevents systemic and structural issues such as the aforementioned project.

Related: 11 logical fallacies examples that undermine an argument

Why does the fallacy happen?

There are several causes of the fallacy, including:

Irrational thinking

Economics is a primarily rational field, with a focus on the idea that people make decisions on a rational basis. For example, if a decision provides more value for a party than it costs, then the party goes through with making that decision. A decision that costs more than it returns isn't ideal. The fallacy is an instance of emotional decision-making infiltrating economics.

After investing a lot into a project, people have an attachment to it. They forgive projects exceeding budgets in these cases, as the cost of the investment exceeds the benefits and returns on the project. This is commitment bias. Commitment bias occurs when individuals commit to previous decisions in spite of new evidence emerging that presents the original decision as unwise.

Related: How to use the rational model of decision making (with tips)

Loss aversion

Loss aversion refers to the idea that people feel the impact of a loss more than the positive impact of a gain. This makes people likely to avoid making a loss rather than seeking a gain. A sunk cost refers to an investment that already exists, and not following through on this project means the resources turn from an investment into a loss. People make a decision focusing on avoiding the loss of their investment as it's something more tangible to them.

This is another emotional response to the situation. Avoiding the fallacy, in this case, means a change of perspective. Pulling out of a project prior to losing any further resources means the resources are available for future projects, increasing the organisation's available resources. A combination of loss aversion and commitment bias makes this change of perspective more difficult.

Related: What is loss aversion and how do you mitigate it? (A guide)

Examples of the fallacy

There are several examples of the Concorde fallacy, which you can categorise into several segments. These include:

Individual level

A fallacy on an individual level is one that refers to cases in which a single person experiences the Concorde fallacy. This commonly refers to cases in which somebody makes a financial decision such as a small purchase which does not have the outcome they expect. The scale of the fallacy on a personal level varies from large investments to small treats, such as putting more money into a vending machine that doesn't work.

Example: Jonathan invests in a very old, used car. Identical cars that run perfectly cost £10,000. While the vehicle doesn't work yet, Jonathan bought the car for £2,000 and plans on spending £7,000 on new parts and upgrades. After £7,000 of investment, Jonathan's car still doesn't run. Buying a new gearbox and engine block costs Jonathan £5,000, and the car starts working. The buyer's personal investment in the project means spending £14,000 on the car plus repairs, rather than the base cost of £10,000.

Related: What is strategic decision making? (With examples)

Company level

Companies can experience the fallacy. The scale of the paradox in these cases varies significantly, with some companies following the Concorde fallacy when choosing a supplier and others staying with entire renovation projects through significant cost increases. Stopping projects and plans as a company is a more complex process, as there are several levels of decision-making. Managers of different departments have an influence and reaching a consensus on stopping work requires broad agreement.

Example: JonTec is an investment company focusing on green energy suppliers. They buy stock from BAM, a company investing in a new technology that can revolutionise the market. Over time, it emerges that BAM is struggling with the next step in its research. BAM's stock price decreases. JonTec remains invested in the company, as losses in investments harm the balance book for that period. The investment company loses their money as BAM folds when the technology does not work in later testing.

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Government level

Entire governments can experience the Concorde fallacy. Governments risk experiencing the fallacy as voters regard changing views as negative aspects of a government or a sign of uncertainty. The scale of fallacies at this level is large, as government decisions affect all of those that are within their range. Stopping projects, once a decision takes place, is relatively fast as civil servants follow the instructions of elected ministers and officials.

Example: The local government starts its 'Here to Hear' scheme, travelling across the country by train and holding meetings in all of its districts and constituency areas. As the scheme continues, the government finds that nobody is attending the meetings and each meeting is costing tens of thousands of pounds to hold. The political and financial investment in the project is high and the party continues with the project in spite of the fact there's no benefit to the project continuing for the rest of the month of meetings.

Related: 13 high-paying civil service jobs (with duties and salaries)

Tips for averting the sunk cost falsehood

Some of the tips for avoiding this fallacy include:

Take a step back

When investing a lot of resources into one project, take a step back and examine it from a distance. This reduces your emotional investment in the project and limits the effect emotions have on your decision-making processes. Doing so lessens the chance of commitment bias affecting the way you look at the project and ensures every decision you make is the right decision.

Related: 5 emotional management skills (with definition and benefits)

Use technology

Technology plays a significant part in the decision-making processes of companies and implementing technology in the prevention of the Concorde fallacy is another significant step towards avoiding the fallacy. Implementing AI and machine learning mean an organisation can identify the prospective weaknesses in a project and track the efficacy of any investments that take place. This further removes the risk of emotion in the decision-making process and ensures there is a completely rational and unbiased perspective available.

Related: Industry uses of artificial intelligence (plus benefits)

Complete calculations

When you decide on the future of an investment or project, complete calculations consistently. This includes noting down every bit of investment the organisation spends on the project, where the investment goes and calculating the overall benefit to the organisation of completing the project. By doing so, organisations see a clear crossover point, at which the losses in investment exceed the gains from completing the project. Tracking this accurately informs managers of a time for pulling out of projects before making significant losses.

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