Sunk cost fallacy
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
A sunk cost is money, time or effort already spent that cannot be got back. The sunk cost fallacy is the mistake of carrying on with something only because so much has already gone into it. A rational choice looks only at future costs and future benefits. Past spending is gone whatever you decide, so it should not count. Behavioural economists such as Richard Thaler (Nobel 2017) list it among common ways real people depart from strict rationality.
Example
A state government keeps putting money into a stalled irrigation project because "crores have already been spent". The right question is different: will the extra money bring more benefit than using it somewhere else? Past spending should not decide it.
Don't confuse with
- Opportunity cost: this is the value of the best choice you give up now, so it should guide decisions. A sunk cost is already lost and should be ignored.
- Status quo bias: this is a preference for the current state of things. It has nothing to do with past spending.
Related concepts
- Behavioural economics
- Bounded rationality
- Satisficing
- Heuristics
- Anchoring
- Availability heuristic
- Confirmation bias
- Overconfidence bias
- Prospect theory
- Loss aversion