Sunk cost fallacy – aka the Concorde Fallacy
Have you ever been to see a film or a play and an hour into it (or perhaps even five minutes) thought ‘this is absolutely terrible’ only to sit through the remainder of the show?
I know I have. More than once.
I’ve paid for my ticket and I’d be wasting my money if I were to just leave midway through. So I sit and endure and look at my watch until it’s time to leave.
Why do I (and countless other people) do this?
Because we have fallen for the sunk cost fallacy.
The reality is that the money I have spent on the ticket is gone. There’s no getting it back and whether or not I stay or leave is irrelevant to that expenditure. It may have been a waste of money, but whether I stay or go doesn’t affect that – it’s been spent and I’m not getting it back. To decide to stay, even if I gain no pleasure from it is merely throwing good money (or in this case time) after bad.
Rational decision making does not take account of sunk costs. But we’re not rational beings. And so we cling on to the money we’ve spent or the time we’ve expended, adding to it in order to avoid having to admit to ourselves that it’s gone.
The sunk cost fallacy is far more common than you might think (or care to admit). It’s closely related to our distaste for loss – there’s a huge amount of evidence to show that we tend to much prefer to avoid losses than to make similar sized gains. Daniel Kahneman has written extensively on the subject (picking up a Nobel Prize in economics for his work along the way).
If you’re not convinced that this sort of irrational behaviour goes on in organisations then it’s worth knowing that the sunk cost fallacy is sometimes referred to as the ‘Concorde fallacy’. Despite early signals long before the first commercial Concorde flight took off in 1976, the British and French Governments continued to pump vast amounts of public money into the project – for 27 years!
They’d come too far and turning back was deemed politically embarrassing. So they carried on with the project, despite the costs of continuing being astronomical compared to stopping the entire project. The rational thing to have done would have been to cease immediately. But rationality flies out the door and so we carry on in the hope – rather than the expectation – that we’ll somehow be able to claw back our losses.
And it’s not just commercial operations that fall into the trap. So often we see public bodies continuing with a piece of work or an approach that is consistently failing to provide the revenues or responses expected and yet somehow seems embedded in the work stream.
Sometimes we need to remember to let go. To realise that the time, effort and money we’ve spent is gone and so including it in any assessment of what we do next is not sensible. This becomes all the more important in times of austerity. And often it’s not about scrapping a project – it can be some simple tweaks that can get us on track again. One of the keys is creating an environment where we’re questioning our working approaches rather than continuing on a journey that seems to stretch on into the distance.
One simple way to help avoid the sunk cost fallacy is to use a list of pros and cons for a decision – if a major reason for a particular path (doing or not doing something) is because you’ve already invested money into it….pause and ask yourself whether you’re falling for the sunk cost fallacy.