Sunk Cost Effect : Psychology of Sunk Cost

The psychology of sunk cost, also called the sunk-cost effect and the sunk-cost fallacy, refers to a finding that people tend to continue investing time, money, or effort into an activity, despite evidence that the increased effort will not likely yield the desired outcome. Work by Kahenman (e.g., 2011) and others document the sunk-cost effect.

In common language, the effect has been called "throwing good money after bad" as when an investor continues to purchase stock despite a precipitous decline in stock price.

In "sunk-cost relationships," one partner may invest considerable effort to win the other back even though friends agree there is little or no hope for restoring the relationship. Focusing on losses means an inability to move forward and recover. 

Rego et al. (2018) looked at the sunk-cost effect in committed relationships. Their first expeirment revealed "the likelihood of participants staying in the relationship was higher when money and effort, but not time, had been previously invested in that relationship." In their next study, they looked at time: "Results revealed a sunk time effect, that is, participants were willing to invest more time in a relationship in which more time had already been invested."

People may hang on to old clothes they have rarely or never worn just because they spent so much on the purchase.

The sunk-cost effect can also be seen in religion. For example, people who have a firm commitment to a religious belief despite evidence that many holding a similar faith no longer hold such a rigid belief because it led them to loss of physical health, emotional health, or relationships. A religious person may vigorously invest time, effort, and money defending a previously held belief. This sunk cost effect has been applied to beliefs that divide Christians (Sutton, 2013, 2016). 

The sunk-cost effect can be seen in politics. Many people invest heavily in a political leader. When evidence reveals flaws, they are more likely to stick with the flawed leader than invest in a new leader with more potential. As can be seen in history, seriously flawed leaders can lead to ruin for the wellbeing--an even deaths-- of millions.

Arkes & Blumer (1985) linked the sunk-cost effect to a desire not to appear wasteful in people who increased their attendance following the high price they paid for a season ticket.

The sunk-cost effect generalizes. The focus of research has been on an individual's irrational behavior; however, Christopher Olivola (2018) found an interpersonal effect. that is, people change their behavior in response to other people's past investments.

Sunk-costs, personality, and biopsychology

Fujino et al. (2016) report on the sunk-cost effect, personality, and biopsychology relationship. 

"Using functional magnetic resonance imaging, we investigated neural responses induced by sunk costs along with measures of core human personality. We found that individuals who tend to adhere to social rules and regulations (who are high in measured agreeableness and conscientiousness) are more susceptible to the sunk cost effect. Furthermore, this behavioral observation was strongly mediated by insula activity during sunk cost decision-making. Tight coupling between the insula and lateral prefrontal cortex was also observed during decision-making under sunk costs. " (Abstract)

 

References

Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124–140.

Fujino, J., Fujimoto, S., Kodaka, F., Camerer, C. F., Kawada, R., Tsurumi, K., Tei, S., Isobe, M., Miyata, J., Sugihara, G., Yamada, M., Fukuyama, H., Murai, T., & Takahashi, H. (2016). Neural mechanisms and personality correlates of the sunk cost effect. Scientific reports, 6, 33171. https://doi.org/10.1038/srep33171

Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus & Giroux.

Olivola, C. Y. (2018). The Interpersonal sunk-cost effect. Psychological Science, 29(7), 1072-1083. https://doi.org/10.1177/0956797617752641

Rego, S., Arantes, J., & Magalhães, P. (2018). Is there a sunk cost effect in committed relationships? Current Psychology: A Journal for Diverse Perspectives on Diverse Psychological Issues, 37(3), 508–519. https://doi.org/10.1007/s12144-016-9529-9

Sutton, G. W. (2016). A house divided: Sexuality, morality, and Christian cultures. Eugene, OR: Pickwick. ISBN: 9781498224888

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