Definition
The Sunk Cost Fallacy is a cognitive bias where an individual or organization continues an endeavor as a result of previously invested resources (time, money, or effort), even when continuing is no longer the most rational choice.
Why It Matters
The sunk cost fallacy is a “backward-looking” trap that drains future resources to preserve past ego; identifying it allows individuals and organizations to stop throwing “good money after bad” and instead focus resources on the path with the highest expected future utility.
Core Concepts
- Backward-Looking Bias: Decision-making becomes focused on recouping past losses rather than maximizing future utility.
- Emotional Attachment: The psychological pain of admitting “waste” often outweighs the rational benefit of stopping a failing path.
- Escalation of Commitment: Small initial investments lead to larger and larger follow-on investments to “save” the original project.
- Replacement CEO Test: A tool to break the fallacy by asking what an outsider with no history of past investments would do (Replacement CEO Test).