The Sunk Cost Fallacy

August 19, 2007 · 💬 Join the Discussion

I’m completely buried in work (it’s 2 AM on a Sunday) but this little thought caught my attention because it’s simple and, even so, most people still fall for it. The original post is titled Sunk Cost for Architects, but I think it should be Sunk Cost for Managers. Here’s the translation:

Say you bought a movie ticket but then realize from the reviews that the film is terrible. Assuming you don’t have an idiot friend who’d buy your ticket, you have two options:

  1. Since you already paid for the ticket, you might as well suffer through the film
  2. Throw the ticket away and do something else

Now what?

The sunk cost fallacy is failing to realize that in either case, you’ve already paid for the ticket — so the sunk cost is not relevant in any way to a rational decision.

Case 1: You suffer the cost of the ticket + You suffer through the rest of the film

Case 2: You only suffer the cost of the ticket

Therefore, rationally, option 2 is better.

So, instead of a movie ticket, say it’s the license for some enterprise software… or maybe some custom hardware.

Is there any reason to consider how much was paid for the license or hardware as carrying any weight at all — however small — in the decision about what is the best architectural or future project choice?

Well, unless the management system you operate in punishes rational behavior and rewards irrational behavior.

Total common sense. Economists are more accustomed to studying and cataloguing behaviors like this. I recommend reading about other concepts such as the old and trusty Opportunity Cost. Parkinson’s Law strikes me as the corollary to the Law of Gas Expansion — something every developer (myself included) has suffered through.

Nobody can always be right, but the constant daily exercise of simply thinking with logic and skepticism — rather than operating on dogmas and precepts — greatly improves our odds. Maybe then, if they watch A Beautiful Mind, people will remember a little more of the genius behind Nash Equilibrium rather than just the melodrama.