Is Sunk Cost Fallacy a Fallacy?

gwern

I just finished the first draft of my essay, "Are Sunk Costs Fallacies?"; there is still material I need to go through, but the bulk of the material is now there. The formatting is too gnarly to post here, so I ask everyone's forgiveness in clicking through.

To summarize:

sunk costs are probably issues in big organizations
- but maybe not ones that can be helped
sunk costs are not issues in animals
they appear to be in children & adults
- but many apparent problems can be explained as part of a learning strategy
there are few clear indications sunk costs are genuine problems
much of what we call 'sunk cost' looks like simple carelessness & thoughtlessness

(If any of that seems unlikely or absurd to you, click through. I've worked very hard to provide multiple citations where possible, and fulltext for practically everything.)

I started this a while ago; but Luke/SIAI paid for much of the work, and that motivation plus academic library access made this essay more comprehensive than it would have been and finished months in advance.

To summarize:

sunk costs are probably issues in big organizations
- but maybe not ones that can be helped
sunk costs are not issues in animals
they appear to be in children & adults
- but many apparent problems can be explained as part of a learning strategy
there are few clear indications sunk costs are genuine problems
much of what we call 'sunk cost' looks like simple carelessness & thoughtlessness

(If any of that seems unlikely or absurd to you, click through. I've worked very hard to provide multiple citations where possible, and fulltext for practically everything.)

Well, I always thought it was obvious that "sunk cost" has one advantage going for it.

Placing a single incident of a "sunk cost" in a larger context, "sunk costs" can serve as a deterrent against abandoning projects. I wonder if the virtue of persistence isn't maligned. After all, as limited rationality machines, 1) we hardly ever can look at the full space of possible alternatives, and 2) probably underestimate the virtue of persistence. Pretty much every success story I've ever read is of someone who persisted beyond what you might call "the frustration barrier".

As I think about the error in forecasting expected payoff, it seems to me that unless we have a lot of experience with pushing projects through to the end, we're likely to underestimate the value of persistence, due to compounding effects and comparative advantage (if few people gain some skill).

Placing a single incident of a "sunk cost" in a larger context, "sunk costs" can serve as a deterrent against abandoning projects.

Sure, but why do you expect people to systematically err in judging when it is time to abandon a project? Unless you have a reason for this, this is buck-passing. ('Why do people need sunk cost as a deterrent? Well, it's because they abandon projects too easily.' 'But why do they abandon projects too easily?' 'Heck I dunno. Same way opium produces sleep maybe, by virtue of a dormitive fallacy.')

This line o... (read more)

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