Definition of Sunk Cost Fallacy

What does the term sunk cost fallacy mean? What is meant by the term sunk cost fallacy?

The term sunk cost fallacy refers to the tendency of humans to stick with something even if they know that it’s a bad idea to keep continuing, simply due to the fact that they’ve already sunk so many resources into the endeavor.

Here is a simple example to describe the sunk cost fallacy. Joe owns a business that is losing money. Due to overwhelming competition, there is little hope that Joe’s business will ever become successful enough to actually turn a profit. Joe should close down his business, but he refuses due to the fact that he has already sunk so much time and money into the venture. This is the sunk cost fallacy.

The sunk cost fallacy is also known as the Concorde fallacy. The Concorde project, which was jointly funded by the British and French governments, was continued despite the fact that the project was losing serious money. Why was the project continued? Simply due to the fact that so much money had already been spent on the project. The British and French governments should have had the conviction to terminate the project earlier (a fatal Concorde crash eventually turfed the project), but they didn’t due to the "sunk cost fallacy".

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