Sunk Cost Fallacy: Why We Keep Throwing Good Money After Bad

We are incredibly picky about where we spend our time and money.

When someone wants to meet, we evaluate the usefulness of the meeting before agreeing to their request. If a store sells items that aren’t of interest to us, we leave and take our money elsewhere. We naturally veer towards activities that give us the highest returns.

Every day, we make mental calculations on what we’re doing, what we’re getting out of it, and alternative options out there. Then, we make incremental adjustments to optimize our lives.

In short, we are smart when it comes to deciding how to use our finite resources.

So why is it that once we’ve started something and realized it’s a bad opportunity – knowing full well that it’s draining our time, money, and energy – do we find it hard to stop?

Why the Concorde Failed

In July 2000, a Concorde took off from Charles de Gaulle Airport, Paris, and was set to land in John F. Kennedy Airport, New York. The flight consisted of mostly German passengers on their way to board a cruise ship in New York City.

The aircraft ran over debris as it prepared for takeoff, rupturing a tank and causing a fire. The plane lost control and crashed into a hotel in the suburbs of Paris only two minutes after takeoff. All 109 passengers and crew and four people in the hotel were killed.

Only three years later, the Concorde retired after 27 years of service.

Now, many people who look at the timeline of events believe that the airplane crash caused the Concorde’s retirement. Yet while the crash was a contributing factor, it wasn’t the main reason why the aircraft was put out of service.

When the Concorde first entered service in 1976, it catered to wealthy passengers who were willing to pay a premium for the prestige, luxury, and speed of the aircraft. As a point of reference, a round-trip ticket price on the Concorde from New York to London was $7,995, which was more than 30 times the cheapest plane ticket.

From an engineering perspective, the Concorde was a monument to aviation. Its maximum speed was over twice the speed of sound at Mach 2.04. The flight time from London to New York was 3.5 hours, compared to a Boeing 747’s 7.5 hours.

However, its speed came at the expense of other tradeoffs. The Concorde could only fly half the distance as a Boeing 747, and had a maximum capacity of 100 passengers, compared a 747’s maximum capacity of four times. Noise complaints kept the Concorde from flying over neighborhoods.

The transatlantic flights from London and Paris to New York alone weren’t enough to keep the Concorde up in the skies. Sales were dropping as demand for Concorde flights decreased. The costs of operating a Concorde were rising.

Finally, Air France and British Airways decided it was time to pull the plug for good in October 2003.

In truth, the Concorde’s retirement was a long time coming. The rising costs of aviation fuel in the 1970s made the Concorde an unprofitable project that should have been scrapped long ago.

And yet, the British and French governments kept funding the Concorde well after it was economically viable. For this reason, the fallacy that initial costs justify further expenses is known as the Concorde fallacy.

The Sunk Cost Fallacy in Our Lives

According to microeconomic theory, the only costs that matter in making a rational decision are prospective costs. Whatever you decide at any given moment rests solely on your current alternatives. It is only the future that matters, not the past.

If you made the mistake of misspending your money or wasting your time on something previously, it doesn’t matter anymore. What matters is where you decide to spend your resources moving forward. In other words, sunk costs should not affect your future decisions.

And yet, what happens in theory is vastly different from what happens in the real world.

People do consider where their sunk costs have gone. They make present decisions based on the past. In the sunk cost fallacy (or Concorde fallacy), people use their past costs to justify further expenditures.

It’s something we’ve all experienced at some point in our lives. For example:

• You bought a ticket to an event, only to feel incredibly bored when attending. Having paid the ticket, you stay at the event until it ends.
• You maintain a relationship with someone you don’t enjoy spending time with, mostly because you already invested so much time and energy into the relationship.
• You start reading a book and discover by twenty pages in that you don’t want to continue, but you do so simply because you already started it.

When you see these things from an outsider’s perspective, the answer seems incredibly obvious: Just quit! Cut your losses and move on.

It makes no sense to keep throwing good money after bad when it’s become apparent you’re getting less than what you put in.

However, there are reasons why we persist, knowingly sinking resources into something that doesn’t yield fruit. People fall to the sunk cost effect because:

• They are afraid of loss.
• They remain hopeful that things will turn around eventually.
• Their reputations are at stake, since they were responsible for the initial expenditures.
• They don’t want to appear wasteful – quitting something is an admission that prior resources used were wasted.

Some of these reasons are less rational, such as fearing loss or appearing wasteful. After all, continuing on with a fruitless endeavor will only lead to more loss and waste.

Other reasons are more justifiable. Sometimes, seemingly hopeless investments do turn out profitable in the long run. And when your reputation is at risk, it can make sense to see something through rather than cutting things abruptly.

How to Use the Sunk Cost Fallacy to Your Advantage

On its own, sunk cost fallacy sounds like a bad thing. But when you become aware of the effect and how to use it to your benefit, the sunk cost effect can be a powerful tool in your life.

Here are a few ways to use the sunk cost fallacy to your advantage:

1. “It doesn’t hurt to try” is more harmful than you think.

Whenever you want to try something new, you always hear someone throw in the phrase, “It doesn’t hurt”. As if it’s a harmless little thing to try something you haven’t done before.

But there are costs involved. Once you get started on something, you might find yourself going further, further, and further. Soon, it becomes difficult to turn back and forgo everything you’ve done already.

Let’s say you apply for a job that doesn’t interest you. You figure that it doesn’t hurt simply to apply and go in for a couple interviews. But then, you end up accepting the job and start training for your new role. Those little steps represent sunk costs that are harder to recoup as time passes.

Anytime you do something, there are opportunity costs. By putting your time, energy, and possibly money into something, you forgo the other opportunities that could have been had.

Given the sunk cost effect, it can hurt to try something. It’s important to evaluate opportunities before you take the leap. That’s why people sometimes use a pilot approach or test for viability before investing more resources into a venture.

Do the research first.

2. If you want to persuade someone, draw the person in with a small investment.

Once, I noticed a travel company selling tours using an interesting tactic: For a limited time, you could book a tour with a $1 deposit. This is a major reduction compared to their regular deposit price of hundreds of dollars (Note: the total trip cost is the same for both, as you pay the remaining balance later on).

The numerical value of one dollar is small, but investing that little bit of money is enough to make you feel obligated to join the tour. From a business perspective, getting someone to invest a little bit of their time, energy, or money can encourage them to keep investing.

If you’re telling a story or communicating with others, draw the person in with the most interesting part first. In Made to Stick, they say to “start with the lead.” You begin with the main point, and then continue with the smaller details.

The lead can be “so-and-so restaurant has closed” or “there was a power outage in the neighborhood yesterday.” You begin the story with a hook, enticing someone to keep listening to the rest of what you have to say.

When the person has given up some of their resources for an endeavor, they’re much more likely to give up more in the future.

3. To stop yourself from investing more, put in limit constraints.

Whenever I watched a movie in the past, I would feel compelled to watch it to the end. Even if I was bored. Even if there were other more interesting or productive things I could do with my time.

Now, I set a time limit. If a movie doesn’t interest me after 20 minutes or a book doesn’t compel me to keep reading after 10 pages (or less), I stop.

Besides books and movies, you can also set limits in other parts of your life. If you try testing out something new in your business, you can set a date six months from today to re-evaluate. If you always overeat at restaurants, you can ask for a container early on to avoid finishing everything on the plate.

When you don’t put in limits, you will feel the need to keep going, even if it’s costing you in the long run.

Our Greatest Attribute is Our Downfall

Our tendency to pursue sunk costs reflects on our greatest attribute as humans. We persevere in the face of hardship, perpetually optimistic that things will turn out better. Unfortunately, this same attribute causes us to keep going when prospects look sour.

It hurts to give up, especially when you had high hopes to start with. You feel that somehow, it reflects badly on you as a person. And when you quit, there’s an empty moment where you think, “What do I do now?”

The good news is, with the knowledge of the sunk cost fallacy, you’re more aware that starting is easier than stopping. And with that knowledge, you have greater control on your actions – and of the world around you.

Book Mentioned:

Made to Stick by Chip Heath and Dan Heath