Sunk Cost Fallacy

Also Known as: Concorde Fallacy, Vietnam Fallacy

Description: This fallacy occurs when it is concluded that additional investment should be made in something simply because one is already invested in it. The fallacy has the following general form:

Premise 1: Person/Group A has invested resources in X.

Conclusion: Person/Group A should invest additional resources in X.

This is a fallacy because it does not follow that one should continue expending resources on something simply because resources have already been expended on that thing. This fallacy lacks logical force but has considerable psychological force.

A variant of this fallacy, sometimes known as the Vietnam Fallacy, occurs when it is concluded that one must stick to a course of action simply because one has already started on that course. It has the following form:

Premise 1: Person/Group A has been on course of action C.

Conclusion: Person/Group A should stay on course C or C is a good course of action.

This is poor reasoning because the fact that one has been on a course of action does not prove that it is good or should be continued. To use a silly example, if someone has gotten lost and run three miles down the wrong trail, it does not follow that it is a good idea to keep going down that trail.

Another variant of this fallacy, which is often expressed by the phrase “don’t change horses midstream”, is that one should stick with a leader or policy simply because they have been the leader or the policy. Midstream is often a metaphor for a time of crisis or problems. This variant has this form:

Premise 1: Leader L has been leading or Policy P has been followed.

Conclusion: Therefore, leader L should be retained, or Policy P should continue to be followed.

This is a fallacy because it does not follow that a leader should be kept simply because they are currently the leader or that a policy should be continued simply because it has been followed. Since it is usually used in times of crisis of problems, it can gain psychological force from a psychological desire to avoid change in such times. But this provides no logical force. To take the metaphor literally, if the horse you are on is committed to plunging over the waterfall, you should get off that horse.  While these variants differ from the standard sunk cost fallacy, they all rely on the notion of sunk cost.

A sunk cost is a cost that has already been paid and cannot be recovered. In contrast, a prospective cost is a future cost that could be avoided by acting. Economists generally hold that a sunk cost is not rationally relevant to future decisions since the cost cannot be recovered. Prospective costs, on this view, are rationally relevant to decisions since these costs can be avoided. For example, the money I spent to have my truck’s fuel pump replaced is a sunk cost (although I can obviously sell my truck). If my transmission fails, then that would present a prospective cost: I can avoid that cost by not getting a replacement. If I concluded that I should buy a transmission simply because I have already paid for a fuel pump, then I would have committed this fallacy. This is because the fact that I spent money on the pump does not, by itself, prove that it is a good decision to spend more money on the transmission. It also does not prove that it is a bad decision.

There are various psychological factors that fuel this fallacy. One is loss aversion, a cognitive bias in which people emphasize what they perceive as a loss when deciding. In the case of the sunk cost fallacy, the error is considering the sunk cost as a loss when deciding a future course of action. For example, having invested in a new fuel pump for my truck, I could be averse to losing that investment and thus decide, on that basis, to replace the transmission when it fails. While there could be good reasons to get the transmission replaced, the money I spent on the pump would not be one of these.

Another factor is the influence of a feeling of responsibility for the past investment and that not continuing would be a failure of this responsibility. And, of course, not following up an investment with more investment might be felt to be wasteful. For example, if I did not get the transmission replaced in my truck, I might feel that I wasted the money I spent on the fuel pump. While it is rational to factor in concerns about waste, the sunk cost fallacy is fueled by an unwarranted perception of waste.  Habit and familiarity are also factors that can come into play, especially in the case of deciding to continue a bad job or bad relationship.

As an error of reasoning, the sunk cost fallacy is straightforward: by itself, the fact that a sunk cost has been paid does not entail that investment should continue and it is an error to make this inference. Matters get rather complicated when considerations turn to the broader question of when it is rational to continue to invest in something. While this matter goes far beyond the scope of this work, it should be noted that there can be good (logical) reasons to follow up on an investment, persist on a course of action, or stick with a leader. In these cases, there are reasons beyond the mere existence of a sunk cost.

As an illustration, I have met students who have been only a few classes short of graduation, but who were considering not finishing. If I had told them that they should finish simply because they have already invested all that time and money, then I would have been urging them to fall for this fallacy. Instead, my response has always been to talk to them about their reasons and then point out the advantages of finishing their degree. For example, I will note that if they do not finish, then they are giving up access to better jobs and better pay since most employers do not say “heck, 90% of a degree is good enough for me.”

Defense: The main defense against the sunk cost fallacy is to recognize when a cost is a sunk cost and when the only reason given to continue to invest or stay on a course is this sunk cost.

This fallacy is often self-inflicted and can be fueled by powerful psychological factors. In these cases, recognizing the fallacy and avoiding it can be challenging.

This fallacy can also be used against you to get you to continue to invest, follow a leader, agree with a policy, or stay the course. One particularly pernicious version of this is the exploitation of the sunk cost fallacy by some video game developers. For example, most free-to-play games with microtransactions have core mechanisms built around trying to get players to fall for this fallacy.

The main defense against having the fallacy used against you is to be on guard against likely attempts and to know how this fallacy works. But it can be difficult to resist this fallacy, since doing so is more than just a matter of recognizing the bad logic, it also requires being able to overcome the psychological force of the appeal.  But being aware that the fallacy is being used against you is a good first line of defense.

Example #1

Nancy: “It might be none of my business, but Penny treats you badly. I don’t get why you stick with her.”

Ashley: “You are right, it is none of your business. But we have been together for years. I’ve put a lot of time into this relationship.”

Example #2

David: “And this is our Computer Assisted Advising System Portal. We call it CAASP. Here, try clicking on the link to your students.”

Mark: “Huh, I just get an error.”
David: “Yup. So, try clicking on the Report button.”

Mark: “It crashed the browser.”

David: “Yup.”

Mark: “Why are you showing me this?”

David: “Well, as new faculty you need some university service. So, I added you to the CAASP committee. I served on the committee when I started here twenty years ago. It is your turn.”

Mark: “Why haven’t they switched to something that works? Like the one my grad school uses?”

Taylor: “Because we have invested millions into CAASP. We are not abandoning the project and throwing away all that money.”

Example #3

Mechanic: “Looks like your fuel pump is failing.”

Mike: “That sounds expensive.”

Mechanic: “About $1,000 if you want a new one.”

Mike: “Well, I just spent $4,000 on a new transmission and I don’t want to waste that money. So, okay.”

Example #4

Kelly: “The President has been doing a terrible job. Now he has gotten us into a recession and another war. I am voting for the other guy this fall.”

Sally: “Hey, you don’t want to change horses midstream. We need to stick with the President in this time of crisis and stay the course.”

Kelly: “Won’t he just keep doing the bad job he has been doing?”

Sally: “Stay the course.”