Continuing 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.
Thinking, Fast and Slow
Daniel Kahneman
Losses hurt approximately twice as much as equivalent gains feel good, making people risk-averse for gains and risk-seeking for losses.
People demand more to give up something they own than they would pay to acquire it, because giving it up feels like a loss.
People evaluate outcomes relative to a reference point rather than in absolute terms, are loss-averse, show diminishing sensitivity, and overweight small probabilities.
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?