Sunk cost

A sunk cost (also throwing good money after bad) is the resources (such as money, manpower, or time) that have been expended on a project and cannot be recovered. In analyses of failed or failing projects, a common practice (the sunk cost fallacy) is to allocate more resources (that might be effectively used elsewhere) solely because giving up would mean earlier efforts have been wasted.

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While sunk cost commonly (but not always) refers to money or similar costs, an alternative, more general term is escalation of commitment, which refers to the tendency of people and organisations to continue in the same direction, doing the same thing as before, even if it is clearly leading to failure.[1]

The fallacy is an informal fallacy.

Explanation

Ignoring sunk costs and making decisions based on an analysis of likely future expenditures and potential successes will generally save money and resources in the long term by avoiding any additional expenditure on a project that is doomed to failure. From an economic point of view, what one has already invested is irrelevant to the decision of whether one should invest more. Either one expects a return on this new investment, or not. The earlier money is already spent, and should not enter into your decision.

There are other more general factors too. People may see their identity or status tied up with pursing a particular course of action; organisational factors may mean that pursuing a failing project to the end is judged less badly than admitting defeat and changing course (in military contexts cowardice may be considered worse than a noble death). Continuing may also depend on a range of biases such as confirmation bias, survivorship bias, and other selection biases that lead to people being mistaken about the true situation and believing that "one more push" will bring the desired outcome or given a bit more time a solution will appear.[1]

Examples

Arguments based on the need to justify sunk costs have been deployed in scientific and political circles, generally in circumstances where a group of true believers has already lost the debate but continues to seek funding in an attempt to pull something, or even anything, out of a failed project.

  • The desire to continue the work of Pons and Fleischmann on cold fusion, long after it was discredited, is one prominent example.
  • "We must continue to fight the war in Vietnam, otherwise our soldiers will have died in vain."
  • "I bought those dresses, and you are going to wear them!"[2]
  • Numerous engineering megaprojects such as ConcordeFile:Wikipedia's W.svg, the Sydney Opera HouseFile:Wikipedia's W.svg, the San Francisco–Oakland Bay BridgeFile:Wikipedia's W.svg, and probably High Speed 2File:Wikipedia's W.svg, where national or regional prestige and political factors override business decisions.
  • The tendency of people caught up in advance fee fraud to think "well if I give this Nigerian fraudster a bit more money I'm sure I'll eventually hit the jackpot".
  • The War on Drugs, where rationality comes up against morality: it clearly doesn't work, but admitting failure would mean totally reversing all the "drugs=evil" rhetoric, as well as putting millions of people out of work.

War on terror

A more emotive form of this reasoning figured strongly in American rhetoric on the war on terror, which often framed any proposed drawback from Iraq or Afghanistan as dishonoring the memory of the soldiers who had died in those countries.

International relations

In international relations, the term is used to describe resources that a state has put an area in an effort to show a serious commitment. The permanent military infrastructure that the United States has built in South Korea is a sunk cost designed to show North Korea that the US firmly committed to ensuring the region's stability.[3]

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See also

References
  1. See the Wikipedia article on Escalation of commitment.
  2. Thaler, R. (2015) Misbehaving: The Making of Behavioral Economics. ISBN 978-0-393-35279-5
  3. Thomas Schelling, Strategy of Conflict
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