Sunk Cost Fallacy

Years ago my husband had occasion to explain sunk cost fallacy to me. It is very possible we were in line for a ride at an amusement park when he did so.

According to Oxford Languages, sunk cost fallacy is, “the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial.”[1]

Sunk cost fallacy works like this…it is an error to take into account resources (in that case time) already spent, when making a decision about the future. In the case of an amusement park ride line, imagine you have been waiting in a slow line for a rollercoaster for two hours already. Most people will think, “Well, I have waited two hours already, that would be a waste if I don’t keep waiting.”  The thing is, you might wait another hour and a half. At the point of making a decision, it doesn’t matter how long you have waited, you can’t get that time back no matter what decision you subsequently make. The question is whether you want to continue to wait, if that is worth it. Again, you cannot change what is already spent. Many, if not most, people, will keep waiting in line. Logically, the sunk cost fallacy says that’s a poor choice, if the decision is based on the time already spent. Now, if the next hour and half is worth it for you to stand in line and not ride anything else, then go for it.

Here is a brief (3 min) TED Talk that describes this phenomenon: https://www.youtube.com/watch?v=hdHomRH59zc

The concept didn’t fully sink in for me until it came up this year in a business course I was taking, in the context of evaluating business investments and strategic decisions. Imagine that two years ago, your company, which makes widgets, retooled your production line and installed a press for a type-a widget at a cost of $5 million. At the time, after careful consideration, company executives determined there was a growing market for type-a widgets. Two years later though, the industry has shifted, and demand for type-a widgets has cratered, and it seems clear that type-b widgets are the next wave in the industry. Your type-a machine cannot make type-b widgets. You are faced with the decision to continue to make type-a widgets, or to pivot to type-b widgets. What do you do?

In making this decision, if you are not mindful of the tendency toward and risk of sunk cost fallacy, you are likely to consider the $5 million investment made for the type-a widget machine. However, the company has spent that money no matter what decision you make. It is a sunk cost. And as such, it is irrelevant to the decision of whether to switch your product line (and production facilities) to making type-b widgets. There are formulas for making calculations to consider the options, but the issue with sunk costs is a cognitive one, not a calculation.

Sunk costs are irrelevant for the purpose of making decisions about next steps.

Irrelevant.

Thinking about this in terms of money made the concept easier to grasp for me, though not much easier to accept, especially as I try to apply this concept to life and ministry.

I see the sunk cost fallacy popping up everywhere. In particular, I am increasingly tuned in to seeing it in our ministries, in the local church and beyond. Conceptually, it can show up when we hear or use the phrase, “We’ve always done it this way.” When this phrase suggests that the time and energy invested in a particular way of doing things in the past should dictate a decision moving forward, I think it suffers from sunk cost fallacy. When we look at investments (time, energy, people) poured into a ministry or project in the past, and because of those past investments put our head down and low ahead, without doing a full assessment of the value of continued investment, we suffer from sunk cost fallacy.

It is important to note that setting aside sunk costs in decisions does not imply a value-judgment on those past investments. I think the fear or such value judgments is what makes the sunk cost fallacy so compelling and pervasive in our ministry decisions. What if we decide to no longer invest in a project, does that mean we are suggesting we, or others, who made those investments before were wrong or foolish? Sunk costs fallacy doesn’t invite us to criticize the past—it guides our focus forward. Even if we believe that every single past investment was merited, we can still look ahead at the future and determine that continued investments no longer are.

Making decisions that are not controlled by sunk costs requires a detailed consideration that we are not always used to or equipped for. It is much easier to choose to continue projects we’ve invested in previously. Every single local church budget process I was part of as a local church pastor did some degree of simply carrying forward past projects.

I am intrigued by the idea of how we might make different—and better—decisions at the local church, annual conference and denominational level if we more routinely asked ourselves honest questions about future anticipated outcomes and fruitfulness, and challenged our natural tendencies to consider sunk costs in our decisions. I think the sunk cost fallacy comes so natural to use individually and collectively that it takes very intentional consideration to not only challenge, but even identify when it is popping up.

I would love to hear how you have found ways to identify and challenge sunk cost fallacy in your ministry, as well as times you’ve experienced consideration of sunk costs leading an individual or group to making worse decisions because of it. How can we make better-future oriented decisions? As we worship and serve a God who is always doing a new thing, I think such effort is very much in line with how God calls us to make such decisions.

[1] https://languages.oup.com/google-dictionary-en/