Sunk-Cost Fallacy: How to Avoid Bias Based on Past Decisions




[1 精读] You’re finally taking that much-deserved vacation in the Caribbean. You found the perfect resort online—at a great price—and impressed your friends with your ability to find such a cheap deal at such a beautiful place. You put down a deposit(定金). Then you arrive and discover that those five star reviews were three years old. Today, the hotel is a rat trap. Your deposit is non-refundable (refund 退还,退款).

[2 略读] What will you do next?  You have two options.

[3 略读] Surprisingly, according to some research, you are more likely to choose option 2. The outcome, almost certainly, would be an unpleasant vacation—exactly the opposite of you wanted in the first place. In other words, most people tend to choose the option in which they’ve already invested time, money, and/or personal pride—even when that option is clearly not likely to provide the best outcome. This type of decision is called a “sunk cost fallacy” based on a “sunk cost bias.”

What Is a Sunk Cost?

[4 略读]  A “sunk cost” is an investment that has already been made. It can be an investment of money, time, energy, love, or even personal pride. Sunk cost fallacy is the belief that anything you’ve already invested in deserves greater investment—even if it was a poor investment in the first place, and even if the investment is unlikely to lead to the desired outcome.

[5 略读] Sunk cost bias is a common problem for individuals—but it can also become a serious issue for businesses and government agencies. For example:

What’s So Bad About Sunk Cost Bias?

[6 略读] Most people are biased toward investments they’ve already made. They’ve put so much into a project, product, relationship, or plan of action that they don’t want to “waste” effort.

[7 略读] Under some circumstances, this makes sense—especially when the investment is important, and clear-eyed observation indicates that more time or resources could make the difference between failure and success. No one, for example, would recommend giving up on a marriage at the first sign of trouble—or dumping a major new business project because of a small setback(=difficulty). 

[8] But what happens if you’ve already given that relationship, product, or project all the time and resources it should need for success—and it’s still failing? Logic, along with the laws of probability, tells you to walk away. 

[9 精读] Yet many people and businesses stick with their poor choices because they believe so strongly that they should protect their investment at any cost. This, as Robert Leahy, a psychiatrist and Director of the American Institute for Cognitive Therapy in New York says, is a poor idea.(长难句,主语和谓语间隔很远) As Leahy explains in an article in Forbes: “A model of good decision-making is always based on future utility or future payoff.”

Sunk cost

Why It Makes Sense to Stop Throwing Good Money After Bad (And Why We Do It Anyway)

[10 略读] Imagine flipping a coin(抛硬币) and betting that it will come up heads. It comes up tails. So you double your bet—because it’s more likely to come up heads next time, right? What if it comes up tails five times in row? In that case, it’s much more likely to come up heads the sixth time, right?

[11 略读] Actually, according to the laws of probability, the coin is no more likely to come up heads just because it came up tails last time. There is always a 50% chance that it will come up heads.  But most of us find this mathematical reality very difficult to accept.  It just feels wrong. The result of betting on a sunk cost fallacy in this case? If you kept doubling your bet every time you lost the coin toss, you’d be subjecting yourself to a 50% failure rate—over and over again.

[12 略读] Looking at it that way, it seems foolish to keep throwing good money after bad. Why keep on making the same bet with the same high odds of losing? But psychologically we are programmed to do just that. As a result, we:

[13 精读] This can be devastating(毁灭性的) for people in abusive(虐待,暴力) relationships, soul-numbing jobs, money pit homes, or dead-end lifestyles. It can also be devastating, of course, for businesses.


[14 略读] Why do people fall into the trap of the sunk cost fallacy? There are many reasons. 

How Does the Sunk Cost Fallacy Affect Businesses?

[15 略读] Perhaps the most famous example of the impact of sunk cost fallacy on business is aptly nicknamed “The Concorde Fallacy.” The Concorde was a supersonic (faster-than-sound) airplane designed for elite travelers, funded by the British and French governments. 

[16 略读] Even before the plane was completed, it was clear that it would not be a financial success.  Despite this knowledge, the two governments continued to shell out money to fund the project’s completion. Not surprisingly, the project launched, fizzled(=fail), and quickly died—along with any hope of recouping(收回) the huge amount of money invested.

[17 略读] Why would usually-rational people decide to continue investing in a project that has essentially failed before it even started? The decision to support an investment at any cost is largely psychological rather than rational. Here’s why:

How can we avoid the sunk loss fallacy in business?

[18 精读] There are some simple strategies that can help. Specifically: