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All costs are always ”sunk”. The fallacy is to think that just because you’ve spent a lot of money, time, or effort, that that in itself warrants that you continue.

In your athlete example, as long as she makes her decision based on risk and reward in the future, then that has nothing to do with sunk costs. If however she thought that her outlook as an athlete was bleak, but figured ”I’ve already dedicated seven years to this, might as well continue” - that would be the sunk cost fallacy.

One argument is that the total revenue of Concorde did not cover its total costs, therefore the program should have been cancelled.

But it's more subtle. One interpretation is that past costs don't matter, therefore decisions should be based on expected value of further investments. In a slightly round-about way, more "sunk costs" means higher leverage on future investments.

Whether it's a fallacy depends on high well you can estimate the future expected value, and how it depends on the current state.

Actually, understanding sunk costs may have saved the Concorde rather than killing it. I'm using entirely made up numbers just as an example -- let's say that halfway through development, new estimates of total project costs were $1 billion and total revenue was only projected to be $750 million. Shut it down? Nope, because the first half-billion has already been spent. At this point, the options are to stop and get zero, or spend the second half-billion to see a 750m return. So work continues.

> spend the second half-billion to see a 750m return

or spend the 2nd half-billion on another project that returns more than 750m. Decisions should be made holistically, and consider all opportunity costs.

No. Cost can be in the future. That's the entire point of Cash Flow Analysis in finance and of planning in any other area.

I think the comment you are responding to means that past costs are always sunk.

Thanks! Yes, in this context, this is what I meant.

Of course, all past decisions are sunk. But knowing this doesn't help you decide if they lead you into a situation where your best choice is continuing to make them because the payout is close now, or if they were a bad idea and the best is to abandon their payout and pursue something better.

The one thing that is certain is that those decisions have biased your options into the one they support. Deciding if that bias is strong enough is the hard step.

The sunk cost fallacy only applies when you can see the likely outcome is no longer beneficial and continue anyway.

“ Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell.”

This is not a sunk cost fallacy. You need to make a follow through even though you know its a loosing proposition. The training is a sunk cost, but the fallacy is making a decision based on that sunk cost.

Isn't the notion that you have to follow through a prime example of the sunk cost fallacy?

>Real life is often not as clear. We don’t know whether our costs are sunk or not.

I'm having trouble thinking of when it's not clear.

>Has the athlete who trained 7 years to get to elite status wasted her time, or is she on the brink of a series of pb’s that will rocket her into contention for gold, two months out from the olympics? It’s hard to tell.

>Should Vincent Van Gogh have stopped painting and studied a trade or a profession that would at least pay a living wage? Should his brother Theo have kept supporting him? It depends on when you do the reckoning. In Van Gogh’s case, the Art was never worth anything during his whole lifetime.

How they spent their lives so far was a sunk cost. That's clear. However, the skills they gained from those years should influence a rational choice. The years themselves are irrelevant. Even if they were perfectly rational, the athletes of today are likely to be athletes tomorrow, because it's easier for them to be an athlete tomorrow than an accountant.

The number of years they've sunk training should only come into play if it helps estimate how much further to their goals. Which means they should follow the opposite of the sunk cost fallacy: the less they've sunk so far, the better. Take your example athlete. If she had instead trained for 14 years to reach that same level of skill, even at the same age, shouldn't she see the Olympics as a less likely goal? It took twice as long to get where she is, so chances are it would also take longer to reach Olympic level.

> I'm having trouble thinking of when it's not clear.

I phrased that badly.

Past costs are always sunk. What's often not clear is whether the costs have yielded a positive return or a loss.

If you bought bitcoin at $50K, and the price today is $30K, your investment has yielded a loss.

If you bought Tesla at $100 and the price today is $700, your investment has yielded a profit.

If you've trained 7 years for the 100m freestyle, and today you're ranked fifth in the world, your training investment has gotten you to fifth in the world. Beyond that, it's difficult to assess the value.

What are your aims? What are your prospects?

Let's say your aim is to win an Olympic medal.

Should you train for another year in your quest to win an Olympic medal?

If you train for another year, will you win an Olympic medal?

The only certainty is that if you stop training, you won't win anything, and your investment has been in vain. Your costs are sunk with no return.

It's that certainty of failure by quitting, vs the uncertain but non-zero prospects of winning if you carry on and invest more, that nudges you towards the possibility of sunken costs fallacy i.e. throwing good money or time after bad, even past the point of no return.

I've heard a good example for the sunk coast fallacy, i'll share (because i don't think you're right with your examples).

You see a great-looking one-star restaurant, quite pricey, but you want to try. You pay 100$ for your meal, and sadly in the middle of the meal, you start to feel sick. You really can't taste anything, and you know that the more you eat, the worst you feel.

Saying to yourself "hell, i've paid 100$ for this, i WILL enjoy it until i'm done" is the sunk cost fallacy. Finishing this meal will at most give you 300cals.

That's a clear example of the sunk cost fallacy. What explains it? Why do people persist in investing more to make themselves suffer more?

In the athlete and entrepreneur examples, the outcomes are not as clear or predictable as your one start restaurant example. Things might work out, or they might not. It's impossible to tell.

Almost every athlete, artist, entrepreneur and warrior has dark moments in which they feel doomed to failure. Some of them quit, and we never hear about them. Others keep going regardless. For a few of them that make it through to the other side, the reward is a success that could never have happened without blind faith.

The blind faith is like a flywheel that powers the venture through uncertainty. It's a powerful asset that not everybody has enough of. But it's also a double-edged sword that can result in the sunken costs fallacy.

In the case of many ventures, the only people who can tell the difference between a sunken cost fallacy and a heroic tale of persistence are the historians.

Your comment makes me think of Theranos. Imagine if they could string us along long enough and meanwhile the researchers there figured out some breakthrough. Would we see the con artist as a visionary?

Famously, first three rockets made by SpaceX failed and the one that got into the orbit first was literally the last one they had available funds for. Musk would have been considered entirely rational if he pulled the plug after the third crash, thus saving himself some millions.

Maybe a certain level of irrationality is necessary to push things beyond usual limits, even though that effort often fails.

This thread is confusing to me. I thought everyone knew about sunk-cost fallacy, but all I keep seeing is people referring to "sunk-cost fallacy" like it's the antonym for "persistence" or something.

Sunk cost fallacy isn't saying: don't be persistent in chasing goals, or give up early. It's specifically saying the costs to get you to your current point are already lost and should not factor into whether you chose to continue forward or not. Only the potential future cost and your estimate of likelihood of future success should. Not "how much you're already invested".

Is that even a realistic frame of mind for human beings? I think previous experience will weigh on you, and losing money is a painful emotional experience.

Why? After three failed rockets they knew much more about building rockets, and they could with much more confidence assess their probability of success, so at that point it was more rational to spend money that it was before the three failures.

That example seems more like Musk put a very, very high value on entering orbit. It's not irrational to continue trying to put rockets into orbit if you value that accomplishment more than millions of dollars.

Yes. And I think the world works that way sometimes.

20 years in Afghanistan - screaming out example.

"We can't leave because of troops who died would have died for nothing". That's precisely Sunk Cost Fallacy!! They are already dead and nothing you do can change that - thus it's not relevant to FUTURE or PRESENT decisions. Only future prospects based on the current situation matter, namely, are the prospects for eliminating terrorism or inculcating democracy into the future good NOW? No? Then cut it off to avoid Sunk Cost Fallacy.

Most people realize that was necessary but again Sunk Cost Fallacy seems to have affected the withdrawal: only the past was consider but not the future costs of leaving "badly".

Afghanistan seems to illustrate both continuing to invest too long (20 years) and then once the decision was made (by Obama) to continue investing enough (some say too much) to prop up a democratic Afghan regime, and then not investing enough to ensure a smooth withdrawal after the regime started to collapse.

Often times there is tremendous uncertainty around how much of the cost is actually sunk, and whether there is some liquidation/going concern value that can extracted

The only thing we know for "sure is that quitters don’t win the long games."

Can you cite some evidence proving this statement?

It's a tautology: a quitting a game means you don't win it. It works in the specific game context.

But you may as well quit one game to join another which has more value for you.

Depending on the viewer/commenter's perspective, you quit, you join, you switch gears or just whatever.

... and those who don't win and don't quit are ...

ignored. (Original saying ends with "idiots".

The sunk cost fallacy is also where we get tremendous motivation. A story of a Navy SEAL who spent months trying to find a doctor to get an expensive and dangerous heart surgery so he could qualify for SEAL training comes to mind.

> Vincent Van Gogh have stopped painting and studied a trade or a profession that would at least pay a living wage?

He died poor and unhappy. He became famous only after suicide and all the mental health crap came out.

So probably yeah, his life as was sucked.