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Have you ever continued doing something, even though you knew it wasn’t working, simply because you had already invested so much time, money, or effort into it? If so, you’ve experienced the sunk cost fallacy. What Is An Example Of Sunk Cost Fallacy? It’s a common cognitive bias that leads us to make irrational decisions based on past investments rather than focusing on future outcomes.
The Movie Ticket and the Miserable Night: Understanding Sunk Cost
The sunk cost fallacy is essentially about letting what’s already gone influence decisions about what to do next. Imagine you buy a non-refundable movie ticket for $20. After the movie starts, you realize it’s terrible. Leaving would mean “wasting” the $20 you spent. Staying, however, means suffering through a bad movie. The rational choice, if you’re not enjoying the movie, is to leave. The $20 is gone regardless of whether you stay or go. That money is a “sunk cost”. The sunk cost fallacy tricks us into thinking that we need to “get our money’s worth” by staying, even though staying makes us unhappier.
Sunk costs are costs that have already been incurred and cannot be recovered. They’re in the past. What matters going forward are the potential costs and benefits of continuing versus stopping. Here’s a simple breakdown:
- Sunk Cost: Money, time, or effort already spent.
- Relevant Cost: Future expenses and benefits.
The key is to ignore the sunk cost and focus on the future. Think about opportunity cost. What else could you be doing with your time if you left the terrible movie? Maybe you could enjoy a relaxing walk, read a good book, or spend time with friends. These alternatives become much more appealing when you realize the sunk cost shouldn’t dictate your current decision.
Real-World Sunk Cost Examples
The sunk cost fallacy appears in many different situations. For example, a business might continue investing in a failing project because they’ve already spent a large amount of money on it, hoping to recoup their losses. A person might stay in an unhappy relationship because they’ve “already invested so much time” in it. Or, someone might keep eating a meal even after they are full, because they already paid for it. Here’s a table that summarizes the various scenarios:
| Scenario | Sunk Cost | Rational Decision |
|---|---|---|
| Failing Project | Money already invested | Cut losses and invest elsewhere |
| Unhappy Relationship | Time already invested | End the relationship and seek happiness |
| Bad Meal | Money already spent | Stop eating and avoid discomfort |
By identifying the fallacy, it’s easier to make smart decisions that don’t factor in the past losses.
If you’re interested in learning more about cognitive biases like the sunk cost fallacy, I highly recommend exploring the book “Thinking, Fast and Slow” by Daniel Kahneman. It provides in-depth explanations and fascinating examples that will help you make better decisions in all areas of your life.