Happy 4th of July!! We hope you enjoy food, family, friends, and fireworks today. Before we head out for some fun, we thought we’d share one final addition to our series on behavioral finance. This week is devoted to the Sunk Cost Bias / Fallacy.
The Sunk Cost Bias is essentially continuing to do something despite its negative expected value, because of the amount of money/time/effort that has already been spent. If you have ever uttered the words “Well, I’ve already spent this much…” you were probably a victim of this bias. Here are two, slightly different examples.
You are really excited about a new television series that just came out on Netflix. You watch the first episode and it is amazing. Over the course of the next several weeks, the show starts to get bogged down in secondary plot lines. It doesn’t seem to be getting better, and in fact, it is progressively getting worse. There are a few episodes left and you are completely over it but…….. you continue to finish out the rest of the season because you already committed so much time you felt like you should.
The more you invest in something the stronger your desire to see it through to completion. This can be an even bigger issue when groups of people get together and experience the same thing.
In 1956, the Supersonic Transport Aircraft Committee met in England to discuss building a supersonic airliner between British aircraft and engine manufacturers and the government. The project – named Concorde – moved forward, and in 1962 France joined the group. When the wheels came up on the first Concorde commercial flight in January 1976, the enterprise was already plagued by prohibitive cost overruns (Billions were spent to develop it). By the last Concorde flight in 2003, the English/French financial misadventure had become legendary. They had built a plane that by most comparisons was three times as expensive to operate, had a fraction of the capacity, and was no longer technologically superior to any of its peers. The general consensus was that too much money, time, and pride had been invested by the two countries to abandon it before 2003.
When you are out and about this 4th of July try to keep your decision making forward-looking. The past is the past and money/time/effort already spent shouldn’t influence how you allocate the same for the future.
Have a safe and happy 4th!