What can a supersonic airliner teach us about flawed thinking?
January 21
Subject: Sunk Cost Fallacy-- The Concorde Program
Event: The Concorde’s first flight, 1976
No matter how far you've gone down the wrong road, turn back. -Turkish Proverb
On January 21, 1976, the Concorde made its first commercial flight. This supersonic aircraft that could fly from London to New York in just three and half hours was a joint project by England and France. Even before the first flight, British and French taxpayers contributed over a billion and a half dollars to the program. The state-of-the-art appearance and speed of the aircraft were impressive, but the reality was that the plane never turned a profit. Despite the fact that both England and France were losing large sums of money financing the Concorde program, they continued to operate it at a loss, unwilling to admit that continuing to finance the plane was not financially viable. Despite the fact the Concorde was a fast aircraft, flying at twice the speed of sound, its financiers were slow to see that it was just too expensive to operate. They did, however, finally throw in the towel. The Concorde made its final flight on October 24, 2003, 27 years after its inaugural flight.
Image by Falko Fröhlich from Pixabay
Economists call this the Concorde effect, also known as the sunk cost fallacy, the human tendency to resist cutting our losses when we have invested money or time into something. Nations, companies, and individuals are all susceptible to the sunk cost fallacy. America’s involvement in Vietnam, for example, continued much longer than it should have. Instead of ending the futile campaign, government and military leaders used the sacrifice and the loss of blood and treasure as a rationale to continue the fight.
The key to avoiding the sunk cost fallacy is to focus not on past losses but instead on future costs and benefits. The time, money, or energy you have invested in the past is gone and should be forgotten. The only reasonable course is to make an honest, realistic look at the likelihood of future gains. So, for example, if you are having trouble in a relationship with a significant other, focus on the future, not the past. The length of time that you two have been together, whether it is two weeks or two years, is no reason to stay in the relationship. Instead, focus on the future; is there a real likelihood that this person is someone who will enrich your life tomorrow and into the long term future?
For a first hand example of the sunk cost fallacy, try this thought experiment: Imagine that you have booked a ski vacation in Michigan for a cost of $100. You then discover a better ski trip at a cost of just $50 in Wisconsin, so you buy a ticket for that trip too. You then realize that both trips are booked for the exact same weekend. Neither trip is refundable, so you must decide which one to go on. Which one would it be?
When researchers conducted this experiment in 1985, they demonstrated the true effect of the sunk cost fallacy. Over half of the people chose the more expensive trip. Even though the $100 trip did not promise as much fun as the $50 trip, the potential loss of a greater amount made it harder to give up. Of course, this makes no sense since the amount spent is $150 regardless of which trip is selected. This is why the sunk cost error is a “fallacy”: a belief or feeling that masquerades as a reasonable conclusion but that is in reality logically unsound and invalid (1).
Recall, Retrieve, Recite, Ruminate, Reflect, Reason: How does the Concorde program illustrate the dangers of the sunk cost fallacy, and how can people avoid making this error in their own lives?
Challenge - Why We Fear Losses: What is Loss Aversion? A key factor that contributes to the persistence of the sunk cost fallacy, is a related cognitive bias called “loss aversion.” Do some research on this concept. What is it, and why should people be warned about it?
Sources:
1-McRaney, David. You Are Now Less Dumb. New York: Gotham Books, 2014.
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