Introduction
The sunk cost fallacy is a cognitive bias that occurs when people make decisions based on the resources (such as time, money, or effort) they have already invested in a project or decision, rather than based on the potential outcome of that project or decision. The sunk cost fallacy occurs when people continue to invest in a project or decision, even when it is no longer rational to do so, simply because they have already invested resources in it.
Example
For example, imagine a company that has invested a large amount of money in a new product development project. Despite evidence suggesting that the product is unlikely to succeed in the market, the company continues to invest more money and resources into the project, simply because they have already invested so much.
This is an example of the sunk cost fallacy because the company is making decisions based on the resources they have already invested, rather than on the potential success or failure of the project. The resources that have already been invested are considered “sunk costs,” which are costs that cannot be recovered regardless of whether the project succeeds or fails.
Conclusion
The sunk cost fallacy can lead to poor decision-making and can result in the waste of valuable resources. To avoid this fallacy, it’s important to make decisions based on the potential outcome of a project or decision, rather than based on the resources that have already been invested.
Written in collaboration with Generative AI tech using Notion.so. Cover art generated using MidJourney.com.
