The decisions that we make everyday generally take into consideration the outcomes, rewards, and consequences we may experience after executing a particular action. The puzzling questions arise when we attempt to figure out how exactly these decisions are made and why we stick to a commitment or decision, despite experiencing a negative outcome. The sunk cost fallacy is exactly that. According to Christopher Olivola, an interviewee for an article by Jamie Ducharme called, The Sunk Cost Fallacy Is Ruining Your Decisions. Here's How, "The sunk cost effect is the general tendency for people to continue an endeavor, or continue consuming or pursuing an option, if they’ve invested time or money or some resource in it...That effect becomes a fallacy if it’s pushing you to do things that are making you unhappy or worse off" (Ducharme, 1). The sunk cost fallacy indicates that previous decisions can affect future decisions and behavior, rather than the more common notion of decisions being solely based on future outcomes.
Dr. Brian Sweis et al. explore this phenomenon in their study titled, Sensitivity to "sunk costs' in mice, rats, and humans. Their results suggest, "That it may be more advantageous to calculate reward value through effort expended" (Sweis, 1). Effort already expended is 'known' effort, and an individual who invests a great amount in something tends to give value to it whether or not they receive any benefits. Changing an investment to something unknown poses another risk, and therefore the individual continues to invest more into the original item. A good example of this fallacy is of a person in an unhappy relationship. The person has already invested their valuable time into the relationship, and despite feeling unhappy, they continue to invest more time into the relationship, because it is familiar and they honor their original investment decision.
Ducharme expands on the types of sunk cost fallacies people experience in her article by speaking on the experiments conducted by Olivola. One of the experiments included presenting subjects with hypothetical scenarios and analyzing their decisions. When subjects were asked whether they would prefer to take a more pricey vacation trip, as opposed to a cheaper one, most of them chose the pricier option, even if they preferred the cheaper alternative. This research suggests that individuals value things based on the cost of their investment. Just like we value an item more when we work hard for it, rather than being given the item for free. Reasons behind the existence of this phenomenon remain unclear, but its existence is factual. With the knowledge that this fallacy exists, it is important to become aware of our improper choice-making habits and cut-off an investment when it clearly is not paying it dues.
Citations
Ducharme, J. (2018, August 01). The sunk cost fallacy is ruining your decisions. here's how. https://www.psychologicalscience.org/news/the-sunk-cost-fallacy-is-ruining-your-decisions-heres-how.html
Sweis, Brian, et al. “Sensitivity to ‘Sunk Costs’ in Mice, Rats and Humans.” Science, vol. 361, no. 6398, 2018, pp. 178-181., doi: 10.1126/science.aar8644
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