weekly mental model

for October 13 to October 19


Sunk Cost Fallacy

We have a tendency to continue an endeavor after investing resources into it even if it's no longer worthwhile.

Description

The sunk cost fallacy describes our resistance to stop an endeavor after investing time, money or effort into it. This limits our ability to see its worth in present terms and potentially misallocate additional resources on it. In other words, we're not cutting our losses. Ideally, we would make decisions regarding an endeavor based on relevant information--suck costs are almost always irrelevant.

Examples

  • When selling a used car, the amount originally paid should have not factor into the decision to sell it. Rather, the decision to sell the car should be based on if the owner will get more value from selling it at the current resale price versus keeping it.

  • When working on a business that's not picking up any traction, we may feel obligated to continue due to amount of time and money we've poured into it. That effort is a sunk cost, future decisions regarding the business should ignore it. See also: escalation of commitment.

  • Leaving in the middle of a sports game might feel like we're wasting the money spent on the ticket. However that money has already been spent, it should not impact future decisions.