[HN Gopher] The Sunk Cost Fallacy
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The Sunk Cost Fallacy
Author : zameermfm
Score : 65 points
Date : 2021-08-28 06:15 UTC (1 days ago)
(HTM) web link (thedecisionlab.com)
(TXT) w3m dump (thedecisionlab.com)
| dukeofdoom wrote:
| The Sunk Cost Fallacy is why we are still doing the lockdowns.
| cyounkins wrote:
| Can you elaborate?
| jefffoster wrote:
| There's also a positive framing for the sunk cost fallacy.
|
| Invest your money in something (e.g. exercise equipment) and
| you'll be more willing to spend time using it.
| hitpointdrew wrote:
| >The Sunk Cost Fallacy
|
| Every company that has ever implemented SAP.
| xivzgrev wrote:
| Honest question - in the concert ticket example, the article said
| that " $50 spent on concert tickets..should not be a factor in
| our current decision-making" (because it's irrecoverable).
|
| But what if you are still interested in this show? If you choose
| not to go today, then you would need to purchase another $50
| ticket in the future, thus increasing your total investment to
| $100. But if you go today, despite being sick, your investment
| would only be $50. So the $50 already spent could be a logical
| input into your future decision making...assuming you still want
| to go, and are evaluating a second purchase or not
|
| Is this still sunk cost fallacy?
| GatorD42 wrote:
| Gwern had the ultimate take down of the sunk cost fallacy.
| https://www.gwern.net/Sunk-cost Outside of specific (usually
| government) projects, I tend to think of it as the sunk cost
| fallacy fallacy.
| anovikov wrote:
| Some of the examples here strike me as wrong.
|
| For example: being forced between a $100 trip and a $50 trip,
| both of which are prepaid, if both can't be done because they are
| on same day. It's not a fallacy at all to choose the $100 one -
| even if we are not sure in which way exactly, we are still living
| in a free market so if the cost was 2x without any beneficial
| differences, it wouldn't sustain itself - so that trip is likely
| to be better in _some_ way.
|
| Not dropping out of a paid program with a lower success rate in
| favour of a free one with a higher success rate is a good thing:
| it very likely means that a free one is a cheap, bs thing that
| gives no real knowledge (certainly they won't teach you better
| for free, so if the pass rate is higher it only means that exams
| are simpler to please everyone). Plus, some _time_ is already
| lost on the paid program, and time is money.
| HarHarVeryFunny wrote:
| The ski trip one does seem bogus. The person obviously wanted
| to go on both trips since they bought tickets for both. Unless
| something has changed and they no longer want to go on the $100
| trip in the future, then it makes sense to go on that one now
| to reduce future costs (spend $100 in future vs spend $50 on
| other trip in future).
|
| Whether they enjoy the $50 trip more than the $100 one, or
| think they may do, is irrelevant if they still want to
| experience both (as one can assume by their having bought
| tickets for both).
| ChrisMarshallNY wrote:
| There are many, many corporations that rely on this (Many "cost
| plus" government contractors, for example).
|
| A common pattern, is a deliberate underbid, in order to lock in
| the contract, then a series of additional charges, as the project
| progresses. A contractor tried this recently, on a friend of
| mine. Luckily, he consulted me, and I was able to help him to
| steer clear of that tar pit.
|
| The 419 scam works the same way.
| antasvara wrote:
| That's not necessarily a sunk cost fallacy (at least as I
| understand it). If I add additional charges, the smart thing to
| do isn't necessarily to fire that contractor. This is because
| firing them, then hiring a new contractor to finish the job, is
| possibly more expensive than paying the charges. Asking for
| more bids, choosing a new contractor, then getting them up to
| speed can be costly.
|
| The rational thing to do would be to weigh your options at that
| point. Do I believe that a new contractor can get up to speed
| and finish the project with a smaller budget than the current
| team?
| potatoman22 wrote:
| Cerner and the VA
| vincentmarle wrote:
| Sunk cost fallacy is economics 101, yet most people I know
| (including business-savy people) have not seem to have heard
| about it or fail to recognize it when it affects their decisions.
| HPsquared wrote:
| How things should be done:
|
| Value (to the customer) > Price (sale price) > Cost (to the
| seller).
|
| What's needed is value (which is subjective), not necessarily
| cost.
| wombatmobile wrote:
| It's easy to see the irrationality of the sunken cost fallacy
| when all the inputs and outputs can be quantified exactly and
| completely.
|
| Real life is often not as clear. We don't know whether our costs
| are sunk or not.
|
| Has the athlete who trained 7 years to get to elite status wasted
| her time, or is she on the brink of a series of pb's that will
| rocket her into contention for gold, two months out from the
| olympics? It's hard to tell.
|
| Should Vincent Van Gogh have stopped painting and studied a trade
| or a profession that would at least pay a living wage? Should his
| brother Theo have kept supporting him? It depends on when you do
| the reckoning. In Van Gogh's case, the Art was never worth
| anything during his whole lifetime.
|
| How much did Steve Jobs blow on NeXT? On Pixar? On the Newton? It
| depends on when you do the reckoning, and it depends on what's
| coming around the corner.
|
| The only thing we know for sure is that quitters don't win the
| long games.
| cascom wrote:
| Often times there is tremendous uncertainty around how much of
| the cost is actually sunk, and whether there is some
| liquidation/going concern value that can extracted
| Cederfjard wrote:
| All costs are always "sunk". The fallacy is to think that just
| because you've spent a lot of money, time, or effort, that that
| in itself warrants that you continue.
|
| In your athlete example, as long as she makes her decision
| based on risk and reward in the future, then that has nothing
| to do with sunk costs. If however she thought that her outlook
| as an athlete was bleak, but figured "I've already dedicated
| seven years to this, might as well continue" - that would be
| the sunk cost fallacy.
| yobbo wrote:
| One argument is that the total revenue of Concorde did not
| cover its total costs, therefore the program should have been
| cancelled.
|
| But it's more subtle. One interpretation is that past costs
| don't matter, therefore decisions should be based on expected
| value of further investments. In a slightly round-about way,
| more "sunk costs" means higher leverage on future
| investments.
|
| Whether it's a fallacy depends on high well you can estimate
| the future expected value, and how it depends on the current
| state.
| listenallyall wrote:
| Actually, understanding sunk costs may have saved the
| Concorde rather than killing it. I'm using entirely made up
| numbers just as an example -- let's say that halfway
| through development, new estimates of total project costs
| were $1 billion and total revenue was only projected to be
| $750 million. Shut it down? Nope, because the first half-
| billion has already been spent. At this point, the options
| are to stop and get zero, or spend the second half-billion
| to see a 750m return. So work continues.
| [deleted]
| marcosdumay wrote:
| Of course, all past decisions are sunk. But knowing this
| doesn't help you decide if they lead you into a situation
| where your best choice is continuing to make them because the
| payout is close now, or if they were a bad idea and the best
| is to abandon their payout and pursue something better.
|
| The one thing that is certain is that those decisions have
| biased your options into the one they support. Deciding if
| that bias is strong enough is the hard step.
| xyzzy21 wrote:
| No. Cost can be in the future. That's the entire point of
| Cash Flow Analysis in finance and of planning in any other
| area.
| resoluteteeth wrote:
| I think the comment you are responding to means that _past_
| costs are always sunk.
| Cederfjard wrote:
| Thanks! Yes, in this context, this is what I meant.
| [deleted]
| orwin wrote:
| I've heard a good example for the sunk coast fallacy, i'll
| share (because i don't think you're right with your examples).
|
| You see a great-looking one-star restaurant, quite pricey, but
| you want to try. You pay 100$ for your meal, and sadly in the
| middle of the meal, you start to feel sick. You really can't
| taste anything, and you know that the more you eat, the worst
| you feel.
|
| Saying to yourself "hell, i've paid 100$ for this, i WILL enjoy
| it until i'm done" is the sunk cost fallacy. Finishing this
| meal will at most give you 300cals.
| wombatmobile wrote:
| That's a clear example of the sunk cost fallacy. What
| explains it? Why do people persist in investing more to make
| themselves suffer more?
|
| In the athlete and entrepreneur examples, the outcomes are
| not as clear or predictable as your one start restaurant
| example. Things might work out, or they might not. It's
| impossible to tell.
|
| Almost every athlete, artist, entrepreneur and warrior has
| dark moments in which they feel doomed to failure. Some of
| them quit, and we never hear about them. Others keep going
| regardless. For a few of them that make it through to the
| other side, the reward is a success that could never have
| happened without blind faith.
|
| The blind faith is like a flywheel that powers the venture
| through uncertainty. It's a powerful asset that not everybody
| has enough of. But it's also a double-edged sword that can
| result in the sunken costs fallacy.
|
| In the case of many ventures, the only people who can tell
| the difference between a sunken cost fallacy and a heroic
| tale of persistence are the historians.
| mcny wrote:
| Your comment makes me think of Theranos. Imagine if they
| could string us along long enough and meanwhile the
| researchers there figured out some breakthrough. Would we
| see the con artist as a visionary?
| inglor_cz wrote:
| Famously, first three rockets made by SpaceX failed and
| the one that got into the orbit first was literally the
| last one they had available funds for. Musk would have
| been considered entirely rational if he pulled the plug
| after the third crash, thus saving himself some millions.
|
| Maybe a certain level of irrationality is necessary to
| push things beyond usual limits, even though that effort
| often fails.
| antasvara wrote:
| That example seems more like Musk put a very, very high
| value on entering orbit. It's not irrational to continue
| trying to put rockets into orbit if you value that
| accomplishment more than millions of dollars.
| Ma8ee wrote:
| Why? After three failed rockets they knew much more about
| building rockets, and they could with much more
| confidence assess their probability of success, so at
| that point it was more rational to spend money that it
| was before the three failures.
| vharuck wrote:
| >Real life is often not as clear. We don't know whether our
| costs are sunk or not.
|
| I'm having trouble thinking of when it's not clear.
|
| >Has the athlete who trained 7 years to get to elite status
| wasted her time, or is she on the brink of a series of pb's
| that will rocket her into contention for gold, two months out
| from the olympics? It's hard to tell.
|
| >Should Vincent Van Gogh have stopped painting and studied a
| trade or a profession that would at least pay a living wage?
| Should his brother Theo have kept supporting him? It depends on
| when you do the reckoning. In Van Gogh's case, the Art was
| never worth anything during his whole lifetime.
|
| How they spent their lives so far was a sunk cost. That's
| clear. However, the skills they gained from those years
| _should_ influence a rational choice. The years themselves are
| irrelevant. Even if they were perfectly rational, the athletes
| of today are likely to be athletes tomorrow, because it 's
| easier for them to be an athlete tomorrow than an accountant.
|
| The number of years they've sunk training should only come into
| play if it helps estimate how much further to their goals.
| Which means they should follow the opposite of the sunk cost
| fallacy: the _less_ they 've sunk so far, the better. Take your
| example athlete. If she had instead trained for 14 years to
| reach that same level of skill, even at the same age, shouldn't
| she see the Olympics as a less likely goal? It took twice as
| long to get where she is, so chances are it would also take
| longer to reach Olympic level.
| wombatmobile wrote:
| > I'm having trouble thinking of when it's not clear.
|
| I phrased that badly.
|
| Past costs are always sunk. What's often not clear is whether
| the costs have yielded a positive return or a loss.
|
| If you bought bitcoin at $50K, and the price today is $30K,
| your investment has yielded a loss.
|
| If you bought Tesla at $100 and the price today is $700, your
| investment has yielded a profit.
|
| If you've trained 7 years for the 100m freestyle, and today
| you're ranked fifth in the world, your training investment
| has gotten you to fifth in the world. Beyond that, it's
| difficult to assess the value.
|
| What are your aims? What are your prospects?
|
| Let's say your aim is to win an Olympic medal.
|
| Should you train for another year in your quest to win an
| Olympic medal?
|
| If you train for another year, will you win an Olympic medal?
|
| The only certainty is that if you stop training, you won't
| win anything, and your investment has been in vain. Your
| costs are sunk with no return.
|
| It's that certainty of failure by quitting, vs the uncertain
| but non-zero prospects of winning if you carry on and invest
| more, that nudges you towards the possibility of sunken costs
| fallacy i.e. throwing good money or time after bad, even past
| the point of no return.
| hsnewman wrote:
| The only thing we know for "sure is that quitters don't win the
| long games."
|
| Can you cite some evidence proving this statement?
| Juliate wrote:
| It's a tautology: a quitting a game means you don't win it.
| It works in the specific game context.
|
| But you may as well quit one game to join another which has
| more value for you.
|
| Depending on the viewer/commenter's perspective, you quit,
| you join, you switch gears or just whatever.
| watwut wrote:
| ... and those who don't win and don't quit are ...
|
| ignored. (Original saying ends with "idiots".
| watwut wrote:
| > Vincent Van Gogh have stopped painting and studied a trade or
| a profession that would at least pay a living wage?
|
| He died poor and unhappy. He became famous only after suicide
| and all the mental health crap came out.
|
| So probably yeah, his life as was sucked.
| xyzzy21 wrote:
| 20 years in Afghanistan - screaming out example.
|
| "We can't leave because of troops who died would have died for
| nothing". That's precisely Sunk Cost Fallacy!! They are already
| dead and nothing you do can change that - thus it's not
| relevant to FUTURE or PRESENT decisions. Only future prospects
| based on the current situation matter, namely, are the
| prospects for eliminating terrorism or inculcating democracy
| into the future good NOW? No? Then cut it off to avoid Sunk
| Cost Fallacy.
|
| Most people realize that was necessary but again Sunk Cost
| Fallacy seems to have affected the withdrawal: only the past
| was consider but not the future costs of leaving "badly".
| dave333 wrote:
| Afghanistan seems to illustrate both continuing to invest too
| long (20 years) and then once the decision was made (by
| Obama) to continue investing enough (some say too much) to
| prop up a democratic Afghan regime, and then not investing
| enough to ensure a smooth withdrawal after the regime started
| to collapse.
| redm wrote:
| The sunk cost fallacy only applies when you can see the likely
| outcome is no longer beneficial and continue anyway.
|
| " Has the athlete who trained 7 years to get to elite status
| wasted her time, or is she on the brink of a series of pb's
| that will rocket her into contention for gold, two months out
| from the olympics? It's hard to tell."
|
| This is not a sunk cost fallacy. You need to make a follow
| through even though you know its a loosing proposition. The
| training is a sunk cost, but the fallacy is making a decision
| based on that sunk cost.
| Ma8ee wrote:
| Isn't the notion that you have to follow through a prime
| example of the sunk cost fallacy?
| ErikVandeWater wrote:
| The sunk cost fallacy is also where we get tremendous
| motivation. A story of a Navy SEAL who spent months trying to
| find a doctor to get an expensive and dangerous heart surgery
| so he could qualify for SEAL training comes to mind.
| pontus wrote:
| It's also worth noting that sunk cost is often strongly
| correlated with remaining cost. If you've spent 4 years in a 5
| year PhD program and start questioning your reasons for being
| there, you could frame it in terms of the sunk cost fallacy:
| "just because I've been here for four years, doesn't mean that I
| should continue on". On the other hand, there's a rational
| argument for staying: "at this point I only have one more year to
| go and if I leave now I leave empty handed but if I just stay one
| more year, I'll get a PhD".
| samuel wrote:
| If I understand correctly the sunk cost fallacy your example
| lacks an objectively better alternative, like an opportunity
| related to one of your hobbies, unrelated to your studies,
| which could land you in a great job in some years. As you
| stated it, there's no doubt, staying in the PhD is the only
| rational choice.
| JoeAltmaier wrote:
| Lots of very different strawman situations are being described.
| Sure if you've built expertise and experience in an area of
| effort (athlete; scholar) then you have to balance that against
| the cost of starting over somewhere else.
|
| But if you have only spent time and money, and have nothing to
| show for it? Then 'sunk cost' is indeed a fallacy.
|
| Nothing to see here folks; move along.
| recursivedoubts wrote:
| The sunk cost fallacy fallacy: we have perfect knowledge,
| particularly of domains we haven't poured a lot of time into, and
| therefore can, with certainty, act perfectly rational at all
| times.
| dcanelhas wrote:
| I find the example in the article a bit strange regarding the
| concert.
|
| Wouldn't going to the concert in a sense "recover" the $50 if you
| valued the experience of going to the concert at $50 or more?
| HarHarVeryFunny wrote:
| It does seem a poor example, but I guess the intended point is
| that the logical decision should be "will I more enjoy going,
| or not going?" rather than taking the already "sunk" money into
| account. Of course in the real world, especially if the money
| was a significant amount to you, your enjoyment of staying home
| might genuinely be tainted by the wasted money, and that's just
| as legitimate a factor as anything else figuring into your
| "based on where I'm at now" assessment.
|
| I think a better example, maybe appropriate to this forum,
| might be where you've been spending significant spare time
| working on a project with dreams of future riches, and it
| eventually dawns on you the payoff isn't going to happen (maybe
| the opportunity has passed, or whatever - reason doesn't really
| matter). The question is do you now continue working on the
| project to "at least get the satisfaction of completing it,
| given how much time has been sunk", or do you cut your losses
| and abandon it. Even this isn't a "pure" example since there's
| no reason not to continue if the modified goal (satisfaction)
| is worth the remaining cost to you.
|
| It's probably the case that in most, maybe all, "sunken cost"
| scenarios there is _some_ benefit to continuing to invest in
| it, but the "sunken cost" may distort your judgement of
| assessing that benefit. Even with Concorde, there was
| considerable cachet and advertising benefit in operating
| Concorde, even if it wasn't paying for itself operationally.
| Hokusai wrote:
| No, you don't get the money back. In theory you should act as
| if you got the tickets for free. You are going because you find
| the concert interesting, you do not go because you have already
| spend $50.
|
| Also you take into account future costs. If you want to go to
| the concert and there are several days that you can go, you
| choose to go to the one that you already have tickets.
| Attending any other day will cost you $50.
|
| Another cost is the social consequences. Maybe you do not want
| to go anymore, but you know that your mother will be pissed off
| after she gave you the money. Or you may be judged as
| irresponsible by your friends if you don't go.
|
| That you paid in the past do not matter anymore. But are there
| future consequences what you need to worry about.
| tyjaksn wrote:
| From the article: "In economic terms, sunk costs are costs that
| have already been incurred and cannot be recovered."
|
| It wouldn't be a sunk cost if if going to the concert was still
| valued at $50 or more.
| redm wrote:
| They provide several other articles for additional context,
| such as the Concorde.
| redis_mlc wrote:
| The article is literally trash.
|
| Other people have mentioned the poor concert ticket example.
|
| But the Concorde example is equally bad.
|
| The Concorde project started as an exploration between Boeing
| and European partners. Boeing didn't believe in any of the
| assumptions, including primacy of hub and spoke, so pulled
| out.
|
| The British did later threaten to pull out of the project
| over costs, but the French threatened everything short of
| war. So the British continued for reasons of diplomacy. There
| was the additional benefit of European technology
| development, likely resulting in Airbus.
|
| How bad was the Concorde project? The British and French not
| only had separate management and test teams, but also
| separate assembly lines.
|
| The British test pilot said the two teams barely talked to
| each other, with the French being rigid and standoffish.
|
| https://www.airbus.com/newsroom/stories/concorde-day.html
| readingnews wrote:
| That example is one I have seen in nearly every article I have
| read on the sunk cost fallacy, and every time a thought occurs:
| "can anyone come up with a better one?" If I am truly sick on
| the day of the concert, I call my friends and give them the
| ticket. It seems trivial.
| orwin wrote:
| The best example i know is related, it that you feel sick in
| the middle of a meal at a one-star restaurant (let's say on
| the third dish).
| HarHarVeryFunny wrote:
| That's a decent example, but I don't see why one-star vs
| five-star would make any difference. It's also depends if
| continuing to sink time/money into the meal (by having
| desert, say) would make you feel more sick or not. Unless
| you feel like vomiting, maybe you want to stay for that
| tasty desert anyways!
|
| You'd only be committing the "sunken cost" mistake if you
| continued with the meal without having some good forwards-
| looking (social, perhaps) reason to do so.
| flerchin wrote:
| If the cost to complete a project divided by its expected annual
| revenue is more than the P/E ratio of your stock, you're in a
| sunk-cost fallacy.
| watwut wrote:
| The people in that situation go to concert, because they really
| really want to see concert and have fun. Most concerts happen
| only once then you have to wait a year for another chance.
| pavlov wrote:
| The ultimate expression of sunk cost fallacy is Bitcoin (and
| Proof-of-Work in general).
|
| "We burned so much coal generating random numbers, it has to be
| worth a lot. Let's spend even more."
|
| Aliens visiting Earth would have a great laugh at our sense of
| priorities.
| 29athrowaway wrote:
| "We have so many lines of COBOL, we have to keep investing in
| COBOL"
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