Sunk Cost Fallacy: Not Knowing When It’s Time to Stop

Learn how the sunk cost fallacy influences decision-making and discover strategies to avoid it in this 4:06 minute video lesson.

Imagine you place a $5,000 non-refundable deposit on a venue for your wedding, but later decide to call everything off. What would be the cost of canceling? If you think it’s $5,000, you fell for what’s known as the sunk cost fallacy — a common cognitive bias.

From an economic perspective, it's what we give up going forward with the decision to cancel and does not include the cost of the venue rental, because no matter whether we get married or not we’re out the $5,000. That choice has already been made and is irreversible. It has become what we call a sunk cost. Because sunk costs cannot be changed going forward, they are not relevant to the next decision.

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COLLABORATORS
Script: Jonas Koblin and Jonas Jaquet
Artist: Pascal Gaggelli
Voice: Matt Abbott
Coloring: Nalin
Editing: Peera Lertsukittipongsa
Sound Design: Miguel Ojeda
Production: Selina Bador
Proofreading: Susan

SOUNDTRACKS
Cannonball Swing - RimskyMusic

DIG DEEPER with these top videos, games and resources:

Listen to Annie Duke talk about the power of quitting
Research on Animal decision-making and the ‘Concorde fallacy’
Read how researchers are measuring the sunk costs fallacy by presenting people with questions about what they would do in various hypothetical scenarios.
Economist Mary Hirschfeld talks with Russ Roberts about the nature of our economic activity. The conversation includes a critique of economic theory, including regarding sunk cost as a fallacy.
An overview of the sunk costs fallacy.

SOURCES
The Psychology of Sunk Cost - Hal Arkes and Catherine Blumer (1985)
The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals - Hal Arkes and Peter Ayton (1999)
Mary Hirschfeld on Sunk Costs

CLASSROOM ACTIVITY
Visit our website to access suggested classroom activity on this topic.

CHAPTER
00:00 Introduction
00:37 Jimmy's story
01:15 Sunk cost fallacy
01:56 experiment by Hal Arkes & Catherine Blumer
02:30 3 psychological reasons behind this behavior
03:14 What was your experience
03:40 Patrons credits
03:50 Ending

#sproutslearning #economics #sunkcost

[sprouts]

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[kristidaemon]

One of the things to consider (like with a movie ticket): no one wants to pay twice. Playing with a friend is free and can be done tomorrow. If you want to see a movie, then you will have to buy another ticket, so that's actually losing money, so logically you shouldn't throw away a ticket for something that you didn't pay for yet. Might be the same with education. If you want to do something else, you probably would have to pay for it. No one wants to pay for two universities in a row. You might work with your first profession, get tired of it, save enough money, and then get another degree that you want (or go travel the world, whatever you want to do instead). The only bad example of this phenomenon is in relationships when you think you had invested too much, so you would rather try to change your partner (who didn't change for the last 5-10 years), than quit toxic relationships.

[oldreprobate]

Instead of throwing away spoils fish they should be donated to local farmers as fertilizer. I think that relationship might grow into a reciprocating one. There's nothing better than rotting fish for a vegetable garden. The conspicuous consumption beyond ones needs is much of we the working classes financial problems beyond the wage slavery promoted by corporations and their bought legislators. Mom says: Waste Not, Want Not.

[SircaNoir]

I see the point about the sunk cost fallacy, but food is a special case. Choosing not to eat when you're full may seem rational, but wasting food shouldn't be normalized. Being mindful about waste helps us make better decisions in the future, like planning meals more carefully or thinking twice before ordering too much when eating out. Responsible consumption isn't just about economics but also ethics and sustainability.

[MrBalkanxMix]

Great video! The only channel I watch actually that demonstrates these concepts in an easy way, in which I learn something and also have fun!

[seanbigay]

That bit about finishing your food ... Years ago, while waiting for the rest of our family to join us at the New Jersey Seaquarium, my sister and I got hungry and decided to get ourselves meals. I got a McDonalds meal, she got a full plate of rice, meat and stuff.
Hardly had we sat down to eat than our family arrived. I still had my meal's wrappings, so I carefully wrapped it up to eat later. But I was absolutely stunned to see my sister casually dump her entire meal in the trash!
I'm a Filipino, and we absolutely hate letting our meals go to waste. This incident has haunted me for decades.

[theultimatereductionist]

Not to keep "changing the assumptions", but, at 1:02, at no time did Jimmy change his mind about wanting to see the movie.
The assumption, or, rather, YOUR assumption was: he bought a ticket to see a movie that he WANTS to see. That did NOT change AFTER the invitation. The only way it would be a sunk cost is if you ADD the assumption that "Jimmy would prefer hanging with friends than seeing movie". As you have it now, the value of movie = value of hanging with friends so there IS no fallacy.

[gerstein]

The best example of sunk cost fallacy I know is the gambler who keeps betting because they've already bet so much

[niravjoshi]

Lots of time I had thought of shifting my career to new field but I had always thought that I have spend almost 9 years (4 years of education and 5 years working on the job) in this field and if I change, all that effort and time will be wasted. But I finally decided to let it go and work on shifting the career. I guess I was also held by sunk cost fallacy.

[alanwhiplington]

A lot of people keep repairing their cars because they remember how big the last repair bill was and don't want to waste the money spent on it. This causes them to spend too much repairing the car once more instead of scrapping it. And when I say a lot of people I mean me. I've done it more than once.

[GapYearL]

I'm at a ski Academy. I paid a lot of money and it's for a few months. I have a concussion and I am unable to participate. There are days where I can get over the fact that I'm wasting money but some days I just can't forget it.

[Kevin___e]

Hey, your Sales Incentive payment is all sorted out and good to go!

[EricJohnson-tcbc]

Probably closely related to hoarding. People value their old junk so much they can't get rid of it. I'm a little like that, lots of stuff stashed away that I think might come in handy someday. Sometimes the packrat wins when old stuff is reused and don't need to buy it new. Waste not, want not.

[duvan-solis]

Doesn't seems as such a negative fallacy. From time to time it seems you rather win something too.

[kimiashams]

Hi, please tell me which software is used to creat these kinda videos. I love them😍😍 And I'd like to learn🙏🙏🙏

[EvandroSegundo]

I agree with the first illustration but I prefer to look at it from the perspective of risk and return. Losing the bad fish is part of the cost/risk of that particular business but the return gained from clients that always come back seeking quality should compensate for that. Besides, he could charge more for his better product, assuming the superiority of his product is evident. But I don't agree with the second illustration. Money is just an exchange medium. We actually trade value for value. The value of his work is exchanged for money that can be used to buy value. If he doesn't watch the movie, the path is incomplete and he loses the value of his work. It is not like he will never play football again. That's not a risk.

[chinikery]

I belive any sunk cost that proves halfway its not worth it should be immediatly droped because it would be a waste of time and possible time doing something better. In the case of the ticket scenario i would go to the movie and turn down my friends. There will be more opurtunities to hang out with friends in the future but thats not the case for the movie because they are not permanent meaning there is a time limit on watching a specific movie (sry for my bad english)

[pperrinuk]

I think you need to separate personal and political situations.

A politician may delay realizing losses (wasted sunk costs) because until they are crystalised the politician cannot be judged on them... they can always argue, that they are not sunk costs but further investment that will come good eventually. By the time the loss is realized (when concord was finally decommissioned) those who had wasted the money (and pocketed huge salaries/pensions etc) were long gone.

Look at UK's HS2 - it should have been shut down long ago, it never made sense. But there are loads of people pocketing loads of taxpayers money and politicians whose reputations would be toast if they admitted that they had been wrong all along (and others whose reputations would be trashed for not having just it down long ago).

[mostafaashraf]

Hello
How can i study abroad in a foreign university?
How can i have a student's loan to pay the expensive university fees ?
How can have the material and study it with myself without getting a certificate?

[raydaveed]

He could just offer canned fish products for a proportion of the goods to extend the durability of which who will most likely go bad more quickly. But that's a whole other bussiness. Kind of.