Editing Sunk cost (section)

== Fallacy effect ==
{{See also|Fail fast (business)}}
The bygones principle does not always accord with real-world behavior. Sunk costs often influence people's decisions,<ref name=Bernheim2008 /><ref name=Parayre1995 /> with people believing that investments (i.e., sunk costs) justify further expenditures.<ref>{{Cite journal| issn = 0033-3107| volume = 33| issue = 1| pages = 10| last = Arkes| first = Hal| title = Think Like a Dog| journal = Psychology Today| access-date = 2019-08-05| date = 2000| url = http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=2654578&site=ehost-live}}</ref> People demonstrate "a greater tendency to continue an endeavor once an investment in money, effort, or time has been made".<ref>{{Cite journal| doi = 10.1037/0033-2909.125.5.591| issn = 1939-1455| volume = 125| issue = 5| pages = 591–600| last1 = Arkes| first1 = Hal R.| last2 = Ayton| first2 = Peter| s2cid = 10296273| title = The sunk cost and Concorde effects: Are humans less rational than lower animals?| journal = Psychological Bulletin| date = 1999}}</ref><ref name=Arkes1985>{{Cite journal| doi = 10.1016/0749-5978(85)90049-4| issn = 0749-5978| volume = 35| issue = 1| pages = 124–140| last1 = Arkes| first1 = Hal R| last2 = Blumer| first2 = Catherine| title = The psychology of sunk cost| journal = Organizational Behavior and Human Decision Processes| date = 1985}}</ref> This is the '''sunk cost fallacy''', and such behavior may be described as "throwing good money after bad",<ref>{{Cite encyclopedia| publisher = Cambridge University Press| title = sunk cost fallacy| encyclopedia = Cambridge English Dictionary| access-date = 2019-08-07| date = 2019| url = https://dictionary.cambridge.org/us/dictionary/english/sunk-cost-fallacy}}</ref><ref name=Parayre1995>{{Cite journal| doi = 10.1016/0167-2681(95)00045-3| issn = 0167-2681| volume = 28| issue = 3| pages = 417–442| last = Parayre| first = Roch| title = The strategic implications of sunk costs: A behavioral perspective| journal = Journal of Economic Behavior & Organization| date = 1995}}</ref> while refusing to succumb to what may be described as "cutting one's losses".<ref name=Parayre1995 /> People can remain in failing relationships because they "have already invested too much to leave". Other people are swayed by arguments that a war must continue because lives will have been sacrificed in vain unless victory is achieved. Individuals caught up in psychologically manipulative scams will continue investing time, money and emotional energy into the project, despite doubts or suspicions that something is not right.<ref name="Radford, B. (2017)">{{cite journal |author=[[Benjamin Radford|Radford, Benjamin]] |title=Psychic Arrested in Exorcism Scam |journal=Skeptical Inquirer |date=January 2017 |volume=41 |issue=1 |pages=12–13 |url=https://pocketmags.com/us/skeptical-inquirer-magazine/jan-feb-2017/articles/44303/psychic-arrested-in-exorcism-scam |access-date=18 April 2021}}</ref> These types of behaviour do not seem to accord with rational choice theory and are often classified as behavioural errors.<ref name=McAfee2010>{{Cite journal| doi = 10.1111/j.1465-7295.2008.00184.x| volume = 48| issue = 2| pages = 323–336| last1 = McAfee| first1 = Preston| last2 = Mialon| first2 = Hugo| last3 = Mialon| first3 = Sue| title = Do Sunk Costs Matter?| journal = Economic Inquiry| date = 2010| s2cid = 154805248}}</ref>

Rego, Arantes, and Magalhães point out that the sunk cost effect exists in committed relationships. They devised two experiments, one of which showed that people in a relationship which they had invested money and effort in were more likely to keep that relationship going than end it; and in the second experiment, while people are in a relationship which they had invested enough time in, they tended to devote more time to the relationship.<!--eh?--><ref>{{Cite journal |last1=Rego |first1=Sara |last2=Arantes |first2=Joana |last3=Magalhães |first3=Paula |date=2016-11-29 |title=Is there a Sunk Cost Effect in Committed Relationships? |url=http://dx.doi.org/10.1007/s12144-016-9529-9 |journal=Current Psychology |volume=37 |issue=3 |pages=508–519 |doi=10.1007/s12144-016-9529-9 |s2cid=152208754 |issn=1046-1310}}</ref> It also means people fall into the sunk cost fallacy. Although people should ignore sunk costs and make rational decisions when planning for the future, time, money, and effort often make people continue to maintain this relationship, which is equivalent to continuing to invest in failed projects.

According to evidence reported by De Bondt and Makhija (1988), managers of many utility companies in the United States have been overly reluctant to terminate economically unviable nuclear plant projects.<ref>{{Cite journal |last1=De Bondt |first1=Werner F. M. |last2=Makhija |first2=Anil K. |date=1988-09-01 |title=Throwing good money after bad?: Nuclear power plant investment decisions and the relevance of sunk costs |url=https://linkinghub.elsevier.com/retrieve/pii/0167268188900443 |journal=Journal of Economic Behavior & Organization |volume=10 |issue=2 |pages=173–199 |doi=10.1016/0167-2681(88)90044-3 |issn=0167-2681}}</ref> In the 1960s, the nuclear power industry promised "energy too cheap to meter". Nuclear power lost public support in the 1970s and 1980s, when public service commissions around the nation ordered prudency reviews. From these reviews, De Bondt and Makhija find evidence that the commissions denied many utility companies even partial recovery of nuclear construction costs on the grounds that they had been mismanaging the nuclear construction projects in ways consistent with throwing good money after bad.<ref>{{Cite journal| doi = 10.1007/s40685-014-0014-8| volume = 8| issue = 1| pages = 99–138| last1 = Roth| first1 = Stefan| last2 = Robbert| first2 = Thomas| last3 = Straus| first3 = Lennart| title = On the sunk-cost effect in economic decision-making: a meta-analytic review| journal = Business Research (Göttingen)| date = 2014| s2cid = 154851729| doi-access = free| hdl = 10419/156273| hdl-access = free}}</ref>

[[File:Concorde 216 (G-BOAF) last flight.jpg|thumb|The sunk cost fallacy has also been called the "[[Concorde]] fallacy": the British and French governments took their past expenses on the costly supersonic jet as a rationale for continuing the project, as opposed to "cutting their losses".]]
There is also evidence of government representatives failing to ignore sunk costs.<ref name=McAfee2010 /> The term "Concorde fallacy"<ref>{{cite journal |doi=10.1007/BF00292525 |title=Do Savannah Sparrows Commit the Concorde Fallacy? |publisher=Springer Berlin |first1= P.J. | last1=Weatherhead |s2cid=6144898 |journal= Behav. Ecol. Sociobiol. |volume= 5 |pages=373–381 |issue=4 | year=1979|bibcode=1979BEcoS...5..373W }}</ref> derives from the fact that the British and French governments continued to fund the joint development of the costly [[Concorde]] supersonic airplane even after it became apparent that there was no longer an economic case for the aircraft. The British government privately regarded the project as a commercial disaster that should never have been started. Political and legal issues made it impossible for either government to pull out.<ref name=Gupta2009>{{Cite book| publisher = Global India Publications| isbn = 978-93-80228-02-0| last = Gupta| first = K. P.| title = Cost Management: Measuring, Monitoring & Motivating Performance| date = 2009| url = https://books.google.com/books?id=gtQ6jBgwbvEC}}</ref>

The idea of sunk costs is often employed when analyzing business decisions. A common example of a sunk cost for a business is the [[promotion (marketing)|promotion]] of a brand name. This type of [[marketing]] incurs costs that cannot normally be recovered.{{citation needed|date=June 2024}} It is not typically possible to later "demote" one's brand names in exchange for cash.{{citation needed|date=June 2024}} A second example is [[research and development]] (R&D) costs. Once spent, such costs are sunk and should have no effect on future pricing decisions.{{citation needed|date=November 2021}} A pharmaceutical company's attempt to justify high prices because of the need to recoup R&D expenses would be fallacious.{{citation needed|date=June 2024}} The company would charge a high price whether R&D cost one dollar or one million.{{citation needed|date=June 2024}} R&D costs and the ability to recoup those costs are a factor in deciding whether to spend the money on R&D in the first place.<ref name=cartoon>{{Cite book| edition = 1st| location = New York| publisher = Hill and Wang| isbn = 978-0-8090-9481-3| volume = One: Microeconomics| last1 = Yoram| first1 = Bauman| last2 = Klein| first2 = Grady| title = The Cartoon Introduction to Economics| date = 2010| pages = 24–25}}</ref>

Dijkstra and Hong proposed that part of a person's behavior is influenced by a person's current emotions. Their experiments showed that emotional responses benefit from the sunk cost fallacy. Negative influences lead to the sunk cost fallacy. For example, anxious people face the stress brought about by the sunk cost fallacy. When stressed, they are more motivated to invest in failed projects rather than take additional approaches. Their report shows that the sunk cost fallacy will have a greater impact on people under high load conditions and people's psychological state and external environment will be the key influencing factors.<ref>{{Cite journal |last1=Dijkstra |first1=Koen A. |last2=Hong |first2=Ying-yi |date=2019-01-08 |title=The feeling of throwing good money after bad: The role of affective reaction in the sunk-cost fallacy |journal=PLOS ONE |volume=14 |issue=1 |pages=e0209900 |doi=10.1371/journal.pone.0209900 |pmid=30620741 |pmc=6324799 |bibcode=2019PLoSO..1409900D |issn=1932-6203|doi-access=free }}</ref>

The sunk cost effect may cause [[cost overrun]]. In business, an example of sunk costs may be an investment into a factory or research that now has a lower value or none. For example, $20 million has been spent on building a power plant; the value now is zero because it is incomplete (and no sale or recovery is feasible). The plant can be completed for an additional $10 million or abandoned and a different but equally valuable facility built for $5 million. Abandonment and construction of the alternative facility is the more rational decision, even though it represents a total loss of the original expenditure—the original sum invested is a sunk cost. If decision-makers are irrational or have the "wrong" (different) incentives, the completion of the project may be chosen. For example, politicians or managers may have more incentive to avoid the appearance of a total loss. In practice, there is considerable ambiguity and uncertainty in such cases, and decisions may in retrospect appear irrational that were, at the time, reasonable to the economic actors involved and in the context of their incentives. A decision-maker might make rational decisions according to their incentives, outside of efficiency or profitability.  This is considered to be an ''incentive problem'' and is distinct from a sunk cost problem. Some research has also noted circumstances where the ''sunk cost effect'' is reversed; that is, where individuals appear irrationally eager to write off earlier investments in order to take up a new endeavor.<ref>Heath, Chip. "Escalation and de-escalation of commitment in response to sunk costs: The role of budgeting in mental accounting." ''Organizational Behavior and Human Decision Processes'' 62 (1995): 38-38.</ref>

=== Plan continuation bias ===
A related phenomenon is plan continuation bias,<ref name=Squair2011>{{Cite web|url=https://criticaluncertainties.com/2011/06/26/flying-in-the-rear-view-mirror/|archive-url=https://web.archive.org/web/20150623002211/http://criticaluncertainties.com/2011/06/26/flying-in-the-rear-view-mirror/|url-status=usurped|archive-date=June 23, 2015|title=Flying in the rear view mirror|date=2011-06-26| website=Critical Uncertainties|language=en|access-date=2019-12-28}}</ref><ref>{{Cite web|url=https://safetyrisk.net/safety-and-the-sunk-cost-fallacy/|title=Safety and The Sunk Cost Fallacy|date=2015-06-20|website=SafetyRisk.net|language=en-US|access-date=2019-12-28}}</ref><ref>{{Cite web|url=https://www.thehumandiver.com/blog/17-cognitive-biases|title=17 Cognitive Biases which Contribute to Diving Accidents|website=www.thehumandiver.com|language=en|access-date=2019-12-28}}</ref><ref>{{Cite journal|last1=Winter|first1=Scott R.|last2=Rice|first2=Stephen|last3=Capps|first3=John|last4=Trombley|first4=Justin|last5=Milner|first5=Mattie N.|last6=Anania|first6=Emily C.|last7=Walters|first7=Nathan W.|last8=Baugh|first8=Bradley S.|date=2020-03-01|title=An analysis of a pilot's adherence to their personal weather minimums|journal=Safety Science|volume=123|pages=104576|doi=10.1016/j.ssci.2019.104576|s2cid=212959377 |issn=0925-7535}}</ref><ref>{{Cite web|url=https://www.faa.gov/news/safety_briefing/2018/media/JulAug2018.pdf|title=FAA Safety Briefing – July August 2018|website=FAA}}</ref> which is recognised as a subtle [[cognitive bias]] that tends to force the continuation of a plan or course of action even in the face of changing conditions. In the field of aerospace it has been recognised as a significant causal factor in accidents, with a 2004 NASA study finding that in 9 out of the 19 accidents studied, aircrew exhibited this behavioural bias.<ref name=Squair2011 />

This is a hazard for [[Sea captain|ships' captains]] or [[aircraft pilot]]s who may stick to a planned course even when it is leading to fatal disaster and they should abort instead. A famous example is the [[Torrey Canyon oil spill]] in which a [[SS Torrey Canyon|tanker]] ran aground when its captain persisted with a risky course rather than accepting a delay.<ref name="FT">{{citation |first=Tim |last=Harford |author-link=Tim Harford |date=18 January 2019 |url=https://www.ft.com/content/9e31e990-1a6a-11e9-b93e-f4351a53f1c3 |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/9e31e990-1a6a-11e9-b93e-f4351a53f1c3 |archive-date=2022-12-10 |url-access=subscription |url-status=live |title=Brexit lessons from the wreck of the Torrey Canyon |newspaper=Financial Times}}</ref> It has been a factor in numerous air crashes and an analysis of 279 approach and landing accidents (ALAs) found that it was the fourth most common cause, occurring in 11% of cases.<ref name="FSD">{{citation |first1=Ratan |last1=Khatwa |first2=Robert |last2=Helmreich |date=November 1998 – February 1999 |url=https://flightsafety.org/fsd/fsd_nov-feb99.pdf |title=Analysis of Critical Factors During Approach and Landing in Accidents and Normal Flight |magazine=Flight Safety Digest |pages=1–77}}</ref> Another analysis of 76 accidents found that it was a contributory factor in 42% of cases.<ref name="ASW">{{citation |first1=Benjamin A. |last1=Bermin |first2=R. Key |last2=Dismukes |url=https://flightsafety.org/wp-content/uploads/2009/07/asw_dec06.pdf |title=Pressing the Approach |magazine=Aviation Safety World |pages=28–33 |date=December 2006}}</ref>

There are also two predominant factors that characterise the bias. The first is an overly [[optimism|optimistic]] estimate of probability of success, possibly to reduce [[cognitive dissonance]] having made a decision. The second is that of personal responsibility: when you are personally accountable, it is difficult for you to admit that you were wrong.<ref name=Squair2011 />

Projects often suffer [[cost overrun]]s and delays due to the [[planning fallacy]] and related factors including excessive optimism, an [[unwillingness to admit failure]], [[groupthink]] and [[Loss aversion|aversion to loss]] of sunk costs.<ref name="BIT">{{cite news |author=Behavioural Insights Team |date=July 2017 |url=https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627790/lit-review-exploration-of-behavioural-biases.pdf |title=A review of optimism bias, planning fallacy, sunk cost bias and groupthink in project delivery and organisational decision making |work=An Exploration of Behavioural Biases in Project Delivery at the Department for Transport |publisher=[[GOV.UK]]}}</ref>