Definition: A cognitive bias where individuals continue investing time, money, or effort into a decision because of prior investments, even when those costs are irrecoverable.
Core Principle: “Past costs should not influence future decisions.”
Example:
- You buy a $100 ticket to a concert, but the event is terrible.
- Despite the poor experience, you stay to “justify” the ticket cost.
Why It Matters:
- First-Order Thinking: Focuses on immediate losses (e.g., “I already paid for the ticket”).
- Second-Order Thinking: Evaluates long-term consequences (e.g., “Staying will waste more time and money”).
Mental Models:
- Pareto Principle: 20% of effort often drives 80% of outcomes; clinging to sunk costs may waste the 20% that matters.
- Opportunity Cost: The value of the next best alternative forgone (e.g., using time at the concert instead of a better activity).
Mitigation Strategies: - Ask: “If I had no prior investment, would I still choose this?”
- Use Inversion Principle: Consider the opposite—what would I do if the sunk cost didn’t exist?