Continuing an endeavor because of previously invested resources (time, money, effort) that cannot be recovered, even when continuing is irrational.
Loss aversion and the endowment effect combine to create the sunk cost fallacy. Abandoning a project means realizing the loss of past investments, which hurts more than the equivalent foregone gain of cutting losses. People attend concerts they no longer want to see because they paid for tickets, hold losing stocks because selling realizes the loss, and continue failing projects because of past investments. Rational decision-making should ignore sunk costs (they're gone regardless) and focus only on future costs and benefits.
A company continues funding a failing product because they've already invested $10 million, even though future prospects are poor. The $10 million is gone regardless—the decision should depend only on future costs and benefits.
Past investments should influence future decisions—sunk costs are gone regardless of what you do next, so they're irrelevant to optimal decision-making.
True or False: The sunk cost fallacy occurs because people fail to realize that past investments are gone regardless of future decisions.
How does the sunk cost fallacy relate to the endowment effect?
Logically equivalent choices produce different decisions when framed differently (as gains vs. losses, or with different reference points).
PrincipleFast, automatic, unconscious cognitive processing that operates through pattern recognition and associative memory without deliberate effort.
Mental ModelSlow, effortful, conscious cognitive processing required for complex calculations, unfamiliar tasks, and deliberate reasoning.
Mental ModelThe tendency to rely too heavily on the first piece of information encountered (the anchor) when making decisions, even when it's arbitrary or irrelevant.
PrincipleJudging the frequency or probability of events by how easily examples come to mind, leading to overestimation of vivid, recent, or emotional events.
PrincipleJudging probability by similarity to stereotypes or prototypes, while ignoring base rates and sample size.
PrincipleWhen faced with a difficult question, System 1 automatically substitutes an easier question without conscious awareness of the switch.
FrameworkLosses hurt approximately twice as much as equivalent gains feel good, making people risk-averse for gains and risk-seeking for losses.
PrincipleContinuing an endeavor because of previously invested resources (time, money, effort) that cannot be recovered, even when continuing is irrational.
A company continues funding a failing product because they've already invested $10 million, even though future prospects are poor. The $10 million is gone regardless—the decision should depend only on future costs and benefits.
Past investments should influence future decisions—sunk costs are gone regardless of what you do next, so they're irrelevant to optimal decision-making.
Sunk Cost Fallacy is explored in depth in "Thinking, Fast and Slow" by Daniel Kahneman. Distilo provides a deep AI-powered analysis with key insights, audio narration, and practical frameworks.