💸 Sunk Cost Fallacy

Let’s talk about the Sunk Cost Fallacy.

💡

The Sunk Cost Fallacy is the tendency to continue a project in which we have already invested time, effort or money, minimising downsides and new information in the process.

🤔 Why you should care about it

“The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy, or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause.” - Rolf Dobelli, author of The Art of Thinking Clearly.

Engineering teams can encounter the Sunk Cost Fallacy at:

The feature level (carrying on coding a feature, even if there is no proof it will eventually work);
The code level (patching and maintaining legacy code, just because it took so long to write).

😫 Problem(s)

We fall for the Sunk Cost Fallacy due to the following cognitive biases:

Commitment bias —> Following a previous decision, disregarding new evidence contradicting the decision, just because we made it

Loss aversion —> Avoiding losing situations since losses feel much worse than gains.

Endowment effect —> Attributing more value to something we own (or make) than something we buy.

😃 Solution

To avoid falling for the Sunk Cost Fallacy:

1/ Always disregard previous costs —> Only make decisions based on current information, independently of past investments.

2/ Make bets instead of estimates —> Identify the maximum amount you’re willing to spend on a feature (based, for example, on projected benefits), and stop when you reach the threshold.

3/ Use committees—> People that are not emotionally attached to a project are less likely to be biased towards it.

4/ Organise regular “cleaning” sessions —> Ask developers to regularly inspect old code to improve, replace or delete it. The more we delete code, the less attached we are to it.

💡 Key Concepts

Cognitive Bias —> A systematic pattern of deviation from norm or rationality in judgment, sometimes leading to perceptual distortion, inaccurate judgment or illogical interpretation.

Bygones principle —> The action of ignoring past costs and only considering future costs and benefits when making decisions.

Iterative Decision Making —> Regularly revisit past decisions to update them with newly available data.

🤨 Typical Behaviours

“We’ve spent so much time trying to solve this problem, we can’t give up now!” —> If projected results are not there, it doesn’t matter how long you work on a project.

“We just learned new information that makes us confident that, now, we’re gonna ship the project.” —> The only relevant information to consider is the one impacting future results, not past decisions.

“If we had more resources, we could finally finish this project.” —> Adding more resources to a late software project makes it later (Brooks’s law)

📚 Top books

⚙️ Tools

How Susceptible Are You to the Sunk Cost Fallacy? - David Ronayne, Daniel Sgroi, and Anthony Tuckwell —> The research-based tool presented in this HBR article enables managers to measure their susceptibility to the Sunk Cost Fallacy.

📝 Content

📼 Why should I ignore sunk costs in a decision? (00:04:55) - Dan Ariely —> quick introduction video from Dan Ariely’s course on decision making.

📝 The Sunk Cost Fallacy, explained - The Decision Lab —> A comprehensive definition of the Sunk Costs Fallacy and how to avoid it, with multiple references to research work.

📝 The Sunk “Code” Fallacy - The Unicorn CTO —> My take on the Sunk Cost Fallacy for engineering teams.