Recently came across some interesting examples on Concorde fallacy – aka sunk cost fallacy. The fallacy which makes you look silly for all your bad investments. Not sure they teach it in management classes though, do they? They should.
Concorde fallacy means a person/organisation continue to spend/consume resources/ funds/effort on a project/product with a sole rationale that already a great deal of resources/capital/effort has been poured in, even when tangible evidences show that there is no economical viable end results. In other words sunk costs should not influence your further decisions on investments; if they do then it is sunk cost fallacy.
Now the reason it is notorious as Concorde fallacy is due to an unjustified pursuit of a failed project by French and British government. Concorde was a defense aircraft, half way through the development of which there were evidences suggesting Concorde will never be economically feasible. Despite of that, governments continued spending on it with only reason “a lot has been spent on it already”.
Let’s talk about shoes – Let’s suppose you have perfectly working formal shoes. Since people around you notice that you haven’t contributed for golden arrow for a long time, and you visit a showroom to buy new ones. Now, a smart ass salesman sells you a pair double the cost of your current shoes. But on 16th day she starts to hurt your feet, but you can’t take it back since there is no visible damage on the product. What will you do?
- You would still throw the old, working, comfortable shoes to attic and choose to wear brand new one, because you need to utilize all money spent on it. If it continues to hurt you, Karma to blame.
- You would decommission newer one and continue to use older one. Again, you can blame it on karma for money wasted.
- Go shopping again. Golden arrow will be extremely happy and karma never gets tired of taking blame.
If you are answer is 1) sunk cost fallacy 2) poor fellow like me 3) crazy shopaholic.
Let’s come to that interesting example I promised. Concorde fallacy is not just business philosophy; it is of interest to scientists as well. Apparently it’s not just humans who display such behavior; there are examples from biology books too.
Sphex (aka Digger wasps) insects are known to defend their nests with disproportionate amount of energy and rigor that they had spent to build them. In other words, for these wasps under attack, it would be wiser to forfeit and build a new nest, leaving pride aside. May be bad education on economics, eh?
(On related notes to wasps, but not on sunk cost itself)
Lets give it to them, digger wasps aren’t exactly the brightest folks in insect kingdom. They are known to show OCD as well. They are so much concerned about security of their nest, they become obsessive and compulsive. This is straight from Wikipedia:
Some Sphex wasps drop a paralyzed insect near the opening of the nest. Before taking provisions into the nest, the Sphex first inspects the nest, leaving the prey outside. During the inspection, an experimenter can move the prey a few inches away from the opening. When the Sphex emerges from the nest ready to drag in the prey, it finds the prey missing. The Sphex quickly locates the moved prey, but now its behavioral “program” has been reset. After dragging the prey back to the opening of the nest, once again the Sphex is compelled to inspect the nest, so the prey is again dropped and left outside during another stereotypical inspection of the nest. This iteration can be repeated again and again, with the Sphex never seeming to notice what is going on, never able to escape from its programmed sequence of behaviors.