A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions

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sunk-cost fallacy

When one makes a hopeless investment, one sometimes reasons: I can’t stop now, otherwise what I’ve invested so far will be lost. This is true, of course, but irrelevant to whether one should continue to invest in the project. Everything one has invested is lost regardless. If there is no hope for success in the future from the investment, then the fact that one has already lost a bundle should lead one to the conclusion that the rational thing to do is to withdraw from the project.

To continue to invest in a hopeless project is irrational. Such behavior may be a pathetic attempt to delay having to face the consequences of one's poor judgment. The irrationality is a way to save face, to appear to be knowledgeable, when in fact one is acting like an idiot. For example, it is now known that Lyndon Johnson kept committing thousands and thousands of U.S. soldiers to Vietnam after he had determined that the cause was hopeless and that the U.S. would not win the war (McMaster 1998: 309). George W. Bush continues to argue that thousands more soldiers and billions more dollars be committed to the war on Iraq, despite the fact that the preponderance of the evidence indicates not only that the war can't be won but that the U.S. has no definite idea of what winning even means here.

This fallacy is also sometimes referred to as the Concorde fallacy, after the method of funding the supersonic transport jet jointly created by the governments of France and Britain. Despite the fact that the Concorde is beautiful and as safe as any other jet transport, it was very costly to produce and suffered some major marketing problems. There weren't many orders for the plane. Even though it was apparent there was no way this machine would make anybody any money, France and England kept investing deeper and deeper on the grounds that they had already invested a lot of money.

The crash of Air France Flight 4590 on July 25, 2000, that killed 113 people—even though it was due to a freak accident and not a design flaw—put an end to any hope that anyone might have had for  further development of the Concorde.

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further reading

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books and articles

Arkes, H. R., & Ayton, P. (1999). The sunk cost and Concorde effects: Are humans less rational than lower animals? Psychological Bulletin, 125, 591-600.

Belsky, Gary and Thomas Gilovich. Why Smart People Make Big Money Mistakes-And How to Correct Them: Lessons from the New Science of Behavioral Economics (Fireside, 2000).

Dawes,Robyn M. Everyday Irrationality : How Pseudo Scientists, Lunatics, and the Rest of Us Systematically Fail to Think Rationally (Westview Press, 2001).

McMaster, H. R. (1998). Dereliction of Duty: Johnson, McNamara, the Joint Chiefs of Staff, and the Lies That Led to Vietnam. Harper Perennial.

websites

The Sunk-Cost Fallacy - Bush falls victim to a bad new argument for the Iraq war. By Barry Schwartz

Werther Report: The Sunk Cost Fallacy

Last updated 05-Dec-2013

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