The sunk cost fallacy occurs when individuals continue investing in a project, decision, or activity based on the amount of resources (time, money, effort) already committed, rather than evaluating the current and future value or potential return. This fallacy leads to irrational decision-making, as people feel compelled to justify past investments instead of cutting their losses and making choices based on current circumstances and future benefits.
Example of Sunk Cost Fallacy
- A company has invested millions of dollars in developing a new product. Despite market research indicating low demand and initial trials failing, the company continues to invest more money in the hope of eventually making the product successful, rather than cutting their losses and reallocating resources to more promising projects.
It would be more rational to stop further investment in a failing product and focus on projects with better potential returns. - A student has spent several years and a substantial amount of money pursuing a degree in a field they no longer find interesting or rewarding. Rather than switching to a different field that aligns more with their current interests and goals, they continue to pursue the original degree to justify the time and money already spent.
It is more logical to switch to a field that aligns with current interests and goals, even if it means acknowledging the prior investment as a sunk cost.
