Sunk Cost Fallacy

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Sunk Cost : In economics terms, Sunk Cost is the amount of money already spent / invested that cannot be recovered.

A simple way of explaining Sunk Cost Fallacy :  A situation where we feel that we have put in too much money (in relative terms), that we tell ourself not to quit that project/investment.  This fallacy can also be used in other areas like time, relationship, studies etc.

Examples:

1.  You invested some money in the stocks of a company.  After a while, the stocks is not doing well, and you are starting to lose money.  But you held on to the stocks, as you do not want to waste what you have invested, and hoping that it will do well again.

2.  At the casino's slot machine, you have already dropped a lot of chips into the machine, and the bets put in outweighs the winning.  You chose not to stop, because you have already bet so much, and you hope luck will be on your side soon.

3.  After being with a girl for five years, you realised that there are some incompatibility between you two.  But you are reluctant to give up the relationship, because you have invested so much time and emotion (and money) in her.  Or, you are afraid you cannot find another girl soon (because you are no more young).  So you held on.

4.  You spent one year on a project/research, and found that it is a dead-end.  You are not willing to start over in a new area because of the time and energy you have spent on it.  Or, after spending two years in a university course and realised that you do not enjoy that field of work, you chose to continue because you didn't want to waste the time and effort spent on the course.

5.  At the claw machine, you spent $20 and has yet to grab a toy successfully.  You continued to play, because you have already spent so much on it.

Why is Sunk Cost Fallacy a problem?  Because it affects our decision making.  

In order to overcome this, we need to balance past spending with present and future benefits.  Ask ourselves, are our emotions clouding our judgement? Consider the opportunity cost that we are missing out on.

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