Escalation of commitment is the tendency to invest additional resources in an apparently losing investment, influenced by effort, money and time already invested. If the costs outweigh the benefits, the extra costs incurred are held in a different mental account than the one associated with the first investment.
To visualize this fallacy let us use an example:
Research by Ohio University psychologist Hal Arkes and partner Catherine Blumer suggests that sunk costs may dissuade you from choosing “fun” when it is an option. They asked 61 college students to assume that, by mistake, they had purchased tickets for a $50 ski trip to Wisconsin and a $100 ski trip to Michigan – for the same weekend. The students were told they would have much more fun on the $50 trip to Wisconsin than the $100 trip to Michigan. Then they were asked to choose one of the trips and let the ticket for the other trip go to waste. Surprisingly, a majority of students (33 of 61) chose the less enjoyable $100 trip. It seems the higher sunk cost represented by the $100 payment was more important to them than getting greater enjoyment from the less expensive $50 trip that they had paid for, as well.
This perfectly shows how common this fallacy is. Therefore, it will be useful to take a closer look:
Everybody knows these kinds of situations. It could be an assignment for university or a new case your partner gave to you. Once you begin with your task, you start putting effort into it. However, sometimes things might not seem to work out the way you planned. At this point you have to make a basic, yet crucial, decision. At first glance, it seems rather rational not to consider the investment you already made and to solely look for the right way to solve your task in the future. However, many people are likely to insist on their decisions and follow their previously chosen path to failure. But why is that?
Firstly, and very basically, people do not want to seem inconsistent. One might feel ashamed to tell one’s colleagues or partner that one was wrong and that one has to start over. There is a notion of responsibility for the costs already incurred. Changing of directions seems just like admitting failure. Moreover, one may not understand the concept of sunk costs. Sunk costs are costs that have already been incurred and cannot be recovered. Therefore, the rational solution is to not consider them in the process of future decision making. They are irrelevant data.
This concept is tightly connected to the loss aversion fallacy. People tend to have much stronger preference for avoiding losses compared to gaining benefits. It might seem to people that the sunk costs are only completely lost once the investment is not continued.
However, there are exceptions to this bias. If one assesses the hypothetical outcomes of continued investment versus accepting current losses and ceasing all further investment, choosing the former would not be wrong.
There are a lot of examples for the sunk cost fallacy affecting people in the legal profession. You could be a prosecutor trying to track down a criminal, thus looking for evidence. As soon as you see that there is a great chance that you got the wrong suspect, you should rationally stop pursuing. Or you could be working at a law firm drafting contracts. You might find out that these contracts are not valid in a court of law. Therefore, you should rationally change them, even though you might have already invested months of work in them.
So what is the solution to this problem? You might want to set the investment clock back to zero. As soon as you feel that your investment is failing make a cut. Think about the long-term chances of your investment. Sunk costs are already lost. Thus, better just focus on future benefits and make only this the basis for your decisions.
To sum up, all this goes to say that the sunk cost fallacy is a huge thing in our everyday lives as well as in the professional (legal) sector. Therefore, by being able to challenge this bias you can obtain a useful advantage.
FLORIAN ZINK
Literature
https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/
https://www.behavioraleconomics.com/mini-encyclopedia-of-be/sunk-cost-fallacy/
http://www.investopedia.com/terms/s/sunk-cost-trap.asp
http://www.lifehack.org/articles/communication/how-the-sunk-cost-fallacy-makes-you-act-stupid.html
Kahneman, D. (2011) Thinking Fast and Slow
