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Sunk-Cost Fallacy

The sunk-cost fallacy is the notion that significant past investments will push one to make future significant future investments, even though the investments might not be worthwhile. The idea of sunk cost can easily be traced to our everyday lives decision making. We’ve all sat through the first half of a terrible movie and noticed that is terrible, yet still finished the movie. Our brains subconsciously tell us to continue “investing” our time so as to not “waste” the previously dedicated time.

In a study completed at Northwestern Univeristy, MBA students took part in a study where this phenomenon was studied. During the first stage of the study, students were given a description of a project and asked whether or not to invest as well as the associated cost of starting the project. The second stage presents the same information as well as the previously sunk investment. The key feature of the study is that before advancing to the second stage the participants must first repeat the second stage twenty times for different projects. By the time they return to the first project the participants had forgotten about the reason for the initial investment. The studied showed that the player sees the high value of the first investment and assumes that

The studied showed that the player sees the high value of the first investment and assumes that the there must have been a high initial value. As the game continued, the players would continue investing into projects with a high sunken cost value and would not with those with a low sunken cost value. The researchers hypothesized that the high initial value serves as a subconscious mnemonic as to why we invested in the first place.

Link: http://insight.kellogg.northwestern.edu/article/is_the_sunk_cost_fallacy_actually_smart_business

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