Sunk Cost Fallacy

The addiction to commitment boils down to constantly trying to convince ourselves and others that we are making rational decisions. We do this by maintaining consistency in our actions and defending our decisions in front of the people around us, as we believe it will give us more respect. [Sources: 3]

Barry M. Stav was the first person to study and describe commitment bias. He hypothesized that this change in attitude is due to the need for consistency, which seems to be the driving force of all mankind. 4 Inconsistency is the cause of unpleasant feelings. It is related to cognitive dissonance. Since people are unlikely to recognize the negative consequences of their decisions, confirmation bias will also escalate commitment. Another deviation closely related to the escalation of commitments and sunk cost errors is the escalation of commitments, also known as commitment deviations. This prejudice is also called the delusion of promise escalation or sunk cost. [Sources: 0, 4, 7, 12]

When there is a commitment bias, we carefully select information that makes our decision seem right, while minimizing or even completely ignoring the evidence that we made the wrong choice. It may be us who justifies our past behavior in front of ourselves or in front of others. [Sources: 7]

Confirmation of the Hypothesis and Alternative Explanations Again, my hypothesis is that in some cases we feel pressured about sunk costs, but not in others, because we want to tell flattering yet believable stories about our diachronic behavior, stories in which we have not been harmed. diachronic adversity – and recognizing sunk costs can help achieve this. Another explanation for why we take sunk costs into account invokes prospect theory (Kahneman and Tversky, 1979), which is a descriptive theory of risky decision making. [Sources: 9]

Economists and behaviorists use the related term “sunk cost error” to describe the justification for investing more money or effort in a decision based on previous cumulative investment (“sunk costs”), despite new evidence suggesting that the future costs of continuing such behavior exceeds the expected benefit. More recently, the sunk cost fallacy has been used to describe the phenomenon in which people justify a large investment in a solution based on their previous cumulative investment, despite new evidence that the cost of continuing from today exceeds the cost of the solution. expected benefit. The sunk cost error increases the likelihood that a person or organization will continue a business in which they have already invested money, time, or effort, even if they would not have started a business if they had not already invested in it. [Sources: 4, 6, 8]

The larger the size of the shadow investment, the more people are inclined to invest additional funds, even if the added return on investment is not worth it. The idea that a larger investment in something you’ve already invested in “makes it work” may not only be the result of a sunk cost error, but the additional investment increases business commitment and can increase the likelihood of further investment. for sunk costs. Perhaps even worse, increased commitment to a particular course of action through past investment alone can block needed change and limit innovation. [Sources: 6]

Research by Ohio University psychologist Hal Arkes and his partner Katherine Bloomer shows sunk costs can discourage you from choosing “entertainment” whenever possible. When deciding whether to disconnect from the grid, costs already invested are usually taken into account, as a result of which some of them are more expensive. These are the costs that we most consider when deciding on a choice. [Sources: 6, 12]

Examples of potential costs are potential losses or costs of restocking. In a rational economy, these costs are not part of the decision-making process. People make the sunk cost error when they continue to conduct or endeavor as a result of previously invested resources (time, money, or effort) (Arkes & Blumer, 1985). [Sources: 2, 12]

There is also an interesting phenomenon – the so-called “reverse sunk cost effect” (Heath 1995) or the “Pro Rata fallacy” (Baliga & Ely 2011), in which decision-makers consider sunk costs by discarding them rather than fulfilling them. the project on which the costs were spent. In Teger’s and then Ross and Staw’s studies, situations where completing an action is worth more than completing it has left decision-makers trapped in their current and costly behaviors. In Tesco’s case, those tasked with making the best decisions often ramped up their efforts irrationally, and such irrational decision making was clearly costly. [Sources: 4, 5, 9]

First, we aimed to examine the extent to which people continue to increase their participation in a coherent decision-making situation. We report the results of an experiment inspired by a pivotal study (Staw, 1976) that introduced the concept of “escalation of commitment,” a variant of the sunk cost error. A critical aspect of management decision-making is managing the risks of increasing commitment in the face of a bad course of action. First, the situation requires a lot of resources such as time, money and people invested in the project. [Sources: 3, 4, 5, 11]

You hope to make a difference with additional effort / resources. Sometimes it makes perfect sense to want to continue with a project because of the resources you’ve already invested in it. Once you have spent a large amount of resources, you are wishful thinking. [Sources: 3, 9]

Don’t increase your engagement (despite evidence to the contrary) because you’ve already spent so much time, money, energy, emotion on this action. Entrepreneurs are ripe for “escalating commitments,” as evidenced by their willingness to keep investing in their businesses, even when things go wrong. For example, it found that those responsible for prior losses tend to be more positive about projects and more likely to commit additional resources to them than people who took on projects halfway through. Reinforcement, misrepresentation, and self-justification – three psychological factors that we all are exposed to – can keep us from projects or actions that we initiate. [Sources: 1, 6, 10]

However, when others observe our behavior, most management decisions involve some additional factors. Similarly, it is important for managers to be aware of the potential harm that might be caused by decisions made solely by the power leader. [Sources: 1, 3]

This may sound counterintuitive, but it can provide excellent insight into your thinking process when making decisions. Challenge decisions by asking open-ended, detailed, laser-focused questions that will help you understand their positions and interests. It may be that the party directing you does not have the understanding, data, or cost / benefit analysis to proceed / not continue. [Sources: 10, 12]

Second, I believe that once we understand why we feel pressured about sunk costs, it will no longer be clear that this is always irrational. And, as long as this desire is not offset by other considerations, it should not be irrational to consider sunk costs. [Sources: 9]

The term “irrecoverable” refers to the importance of incurred costs. The term is also used to describe bad decisions in business, government, general information systems, especially software project management, politics, and gambling. [Sources: 8, 12]

Adherence escalation is a pattern of human behavior in which an individual or group facing increasingly negative consequences of a decision, action, or investment continues to pursue that behavior rather than changing course. [Sources: 4]


— Slimane Zouggari


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