The Sunk Cost Fallacy is a psychological phenomenon where individuals continue investing in a decision based on prior investments (time, money, or effort), rather than evaluating the current situation and future benefits. This fallacy can significantly impact decision-making in both personal and professional contexts.

The sunk cost fallacy can manifest in various ways in our personal and daily lives. For instance, consider a gym membership. A person might continue to pay for a costly gym membership they rarely use because they feel that cancelling the membership would mean wasting the money they’ve already spent.

They might also feel compelled to finish a book they’re not enjoying simply because they’ve already invested time reading half of it.

Similarly, someone might hold onto clothes that no longer fit or suit them because they spent a lot of money on them, even though keeping them clutters their wardrobe.

In relationships, people might stay in unhappy or even abusive situations because they feel they’ve invested too much time and energy to leave.

All these can have negative and long-term impacts on individual well-being and happiness. Let’s unpack what they are and what drives behaviour in individuals and businesses.

A film school grad example is Kevin Costner and “Waterworld.”

This 1995 film is notorious for being one of the most expensive films ever made (at the time), with a budget that ballooned to an estimated $175 million.

Costner, who starred in and co-produced the film, invested a significant amount of his own money into the project. As production problems mounted and costs spiralled out of control, instead of cutting his losses, Costner continued to invest more money into the film, falling victim to the sunk cost fallacy.

Despite negative reviews and a lukewarm box office reception in the United States, Costner continued to defend the film and even funded a costly reshoot out of his own pocket. His decision to continue investing in the movie was likely influenced by the substantial amount of money he had already sunk into the project rather than a rational assessment of its future potential. In the end, “Waterworld” was not the blockbuster hit Costner had hoped for. Although it eventually “broke even” due to international box office earnings and video sales, it is often cited as a textbook example of the sunk cost fallacy.

The Sunk Cost Fallacy in Business: The Concorde Project

The Concorde project was a supersonic passenger airliner developed in the mid-20th century. The Concorde was a technological marvel, capable of flying at over twice the speed of sound. However, it was also incredibly expensive to develop and operate, and the high ticket prices made it inaccessible to most travellers.

Despite the clear signs that the Concorde was not commercially viable, the British and French governments continued to invest in the project for decades. They had already sunk billions into the development of the Concorde and were unwilling to admit that the project was a failure.

This is a classic example of the sunk cost fallacy: instead of cutting their losses and investing in more profitable ventures, they continued to pour money into the Concorde simply because they had already invested so much. This decision ultimately led to significant financial losses and is now seen as a textbook example of poor decision-making due to the sunk cost fallacy.