Updated: 24/10/2025 por Jennifer Delgado | Published: 18/04/2024
Within the framework of economics and decision making, sunk costs are all those past costs that a company or person incurred and that cannot be recovered. This type of costs is often compared with prospective costs (the cost that is expected for the future) and depending on the final relationship, it is decided whether it is worth continuing with the project or not.
In traditional microeconomic theory, only prospective costs are truly relevant for making project decisions. Thus, experts propose that the person who must make the decision does not consider sunk costs because these could lead them to take an erroneous and unrational path.
However, studies conducted in the area of behavioral economics have shown that sunk costs usually exert an enormous influence on people’s economic decisions. Why? Simply because we all hate losing.
Let’s put it in simpler words with an example: A person X has set a goal in which he has not only invested money but also a good dose of time and effort. After two years, he realizes that his project is not working as well as he thought and considers the possibility of abandoning it.
At this point he looks back and count how much he has invested in the project. He would hate to waste all the money and time. So he continues with the same project, hoping that sooner or later it will continue to work.
If you have read carefully you may have noticed that this story reveals another problem associated with sunk costs: they lead to naive optimism.
A classic experiment about sunk costs fallacy
In 1968, an experiment was developed that would later become the emblem of this phenomenon. In that study, researchers studied 141 people who placed bets on hair races. Of them, 72 people had finished placing a $2 bet and the rest were going to do so in the next 30 seconds.
The researchers’ hypothesis was that after people bet on a horse, they were more convinced that it would win. That is, a self-affirmation mechanism was activated to counteract the anxiety of the decision that had just been made.
Thus, the researchers asked people who had finished betting and those who had not yet done so, to indicate on a scale from 0 to 7 (seven was the maximum), how sure they were that their horse would be the winner. The results were very curious: those who had not yet made the bet showed an average of 3.48 while those who had already bet increased their confidence by 4.81.
These results have been replicated in other experiments and in different contextual situations, making us see that once we have committed and invested something in a project, sunk costs play tricks on us, making us artificially increase our confidence.
In summary, although it is essential to plan a project, undertake it step by step and commit to it 100% it is equally important knowing when to stop. Something self-help gurus typically don’t teach.
Unfortunately, in some projects there comes a point where we must carry out the cost-benefit analysis, looking objectively at the future of the project. At this time, it is essential not to be seized by the sunk costs fallacy and to stop before incurring other losses, whether of money or time. Intelligence also lies in knowing when to stop.
Reference:
Knox, R. E. & Inkster, J. A. (1968) Post decision dissonance at post time. Journal of Personality and Social Psychology; 8 (4): 319–323.
