The Sunk Cost Fallacy

It’s easy to see the irrationality of the sunken cost fallacy when all the inputs and outputs can be quantified exactly and completely.<p>Real life is often not as clear. We don’t know whether our costs are sunk or not.<p>Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell.<p>Should Vincent Van Gogh have stopped painting and studied a trade or a profession that would at least pay a living wage? Should his brother Theo have kept supporting him? It depends on when you do the reckoning. In Van Gogh’s case, the Art was never worth anything during his whole lifetime.<p>How much did Steve Jobs blow on NeXT? On Pixar? On the Newton? It depends on when you do the reckoning, and it depends on what’s coming around the corner.<p>The only thing we know for sure is that quitters don’t win the long games.

It&#x27;s also worth noting that sunk cost is often strongly correlated with remaining cost. If you&#x27;ve spent 4 years in a 5 year PhD program and start questioning your reasons for being there, you could frame it in terms of the sunk cost fallacy: &quot;just because I&#x27;ve been here for four years, doesn&#x27;t mean that I should continue on&quot;. On the other hand, there&#x27;s a rational argument for staying: &quot;at this point I only have one more year to go and if I leave now I leave empty handed but if I just stay one more year, I&#x27;ll get a PhD&quot;.

There are many, many corporations that rely on this (Many “cost plus” government contractors, for example).<p>A common pattern, is a deliberate underbid, in order to lock in the contract, then a series of additional charges, as the project progresses. A contractor tried this recently, on a friend of mine. Luckily, he consulted me, and I was able to help him to steer clear of that tar pit.<p>The 419 scam works the same way.

Lots of very different strawman situations are being described. Sure if you&#x27;ve built expertise and experience in an area of effort (athlete; scholar) then you have to balance that against the cost of starting over somewhere else.<p>But if you have only spent time and money, and have nothing to show for it? Then &#x27;sunk cost&#x27; is indeed a fallacy.<p>Nothing to see here folks; move along.

Some of the examples here strike me as wrong.<p>For example: being forced between a $100 trip and a $50 trip, both of which are prepaid, if both can&#x27;t be done because they are on same day. It&#x27;s not a fallacy at all to choose the $100 one - even if we are not sure in which way exactly, we are still living in a free market so if the cost was 2x without any beneficial differences, it wouldn&#x27;t sustain itself - so that trip is likely to be better in <i>some</i> way.<p>Not dropping out of a paid program with a lower success rate in favour of a free one with a higher success rate is a good thing: it very likely means that a free one is a cheap, bs thing that gives no real knowledge (certainly they won&#x27;t teach you better for free, so if the pass rate is higher it only means that exams are simpler to please everyone). Plus, some <i>time</i> is already lost on the paid program, and time is money.

Honest question - in the concert ticket example, the article said that “ $50 spent on concert tickets..should not be a factor in our current decision-making” (because it’s irrecoverable).<p>But what if you are still interested in this show? If you choose not to go today, then you would need to purchase another $50 ticket in the future, thus increasing your total investment to $100. But if you go today, despite being sick, your investment would only be $50. So the $50 already spent could be a logical input into your future decision making…assuming you still want to go, and are evaluating a second purchase or not<p>Is this still sunk cost fallacy?

&gt;The Sunk Cost Fallacy<p>Every company that has ever implemented SAP.

There&#x27;s also a positive framing for the sunk cost fallacy.<p>Invest your money in something (e.g. exercise equipment) and you&#x27;ll be more willing to spend time using it.

The ultimate expression of sunk cost fallacy is Bitcoin (and Proof-of-Work in general).<p>“We burned so much coal generating random numbers, it has to be worth a lot. Let’s spend even more.”<p>Aliens visiting Earth would have a great laugh at our sense of priorities.

The sunk cost fallacy fallacy: we have perfect knowledge, particularly of domains we haven&#x27;t poured a lot of time into, and therefore can, with certainty, act perfectly rational at all times.

Sunk cost fallacy is economics 101, yet most people I know (including business-savy people) have not seem to have heard about it or fail to recognize it when it affects their decisions.

How things should be done:<p>Value (to the customer) &gt; Price (sale price) &gt; Cost (to the seller).<p>What&#x27;s needed is value (which is subjective), not necessarily cost.

Gwern had the ultimate take down of the sunk cost fallacy. <a href="https:&#x2F;&#x2F;www.gwern.net&#x2F;Sunk-cost" rel="nofollow">https:&#x2F;&#x2F;www.gwern.net&#x2F;Sunk-cost</a> Outside of specific (usually government) projects, I tend to think of it as the sunk cost fallacy fallacy.

I find the example in the article a bit strange regarding the concert.<p>Wouldn&#x27;t going to the concert in a sense &quot;recover&quot; the $50 if you valued the experience of going to the concert at $50 or more?

If the cost to complete a project divided by its expected annual revenue is more than the P&#x2F;E ratio of your stock, you&#x27;re in a sunk-cost fallacy.

&quot;We have so many lines of COBOL, we have to keep investing in COBOL&quot;

The people in that situation go to concert, because they really really want to see concert and have fun. Most concerts happen only once then you have to wait a year for another chance.

The Sunk Cost Fallacy is why we are still doing the lockdowns.