What is the Sunk Cost Effect?

The Sunk Cost Effect describes a situation in which we continue with an activity for which we have already invested money, time or effort, even if it is not in our interests to do so. The effect occurs because we mistakenly believe a prior investment can be justified by persevering.

We tend to consider what we have already invested as something that we can avoid “losing” rather than accepting that it is an irrecoverable expense. We also forget that things might be gained by changing our course of action. It is this effect that pushes us to stay in the same queue, rather than switching, even if it will take longer overall. The effect is also the reason we continue to wait for a bus that might never arrive.

Examples

This phenomenon also has important professional consequences, as Daniel Kahneman describes in an article for the Harvard Business Review. Attachment to a “Sunk Cost” may push marketing professionals to continue investing in an advertising campaign or an initiative that has already cost a lot of money but is not working. In this case, it would be more rational to avoid wasting more time and money.

Web visitors also experience the Sunk Cost Effect when considering the time they have spent completing an action or reading content. With this in mind, it is possible to reduce cart abandonment by reminding visitors how much time they have invested in making a selection and proceeding to the payment page. 

Sunk Cost Effect

The Sunk Cost Effect pushes people towards irrational decisions in order to avoid the feeling of having wasted time or money in vain. Avoiding this effect is important when analysing a marketing campaign rationally, and highlighting prior investment can help to retain customers.