Harvard Business Review on the The Sunk Cost Fallacy

Here’s an article from the HBR on better decision making.

Have you continued with a project long after you should have abandoned it? Persevered with a relationship even after the point of no return? Dragged yourself to an event in miserable weather just because you already bought the ticket with your hard-earned cash? These are all examples of the “sunk cost effect,” which occurs when someone chooses to do or continue something just because they have invested (unrecoverable) resources in it in the past.

The effect is often attributed to well-known high-stakes decisions across various contexts. For example, the management at General Motors’ reluctance to move away from once-winning strategies is said to have contributed to the firm’s decline late in the last century. In aviation, throwing good money after bad is generally considered to have led to the massive investment by the British and French governments in the Concorde project (indeed, the sunk cost effect is still sometimes referred to as the Concorde Fallacy). And in the political sphere, examples such as the prolonged U.S. military campaigns in Vietnam and Iraq suggest that the effect can lead not only to financial ruin, but also to the loss of tens of thousands of lives.

It is a core lesson in many business economics or decision-making classes that any unrecoverable costs sunk in the past are irrelevant when deciding what to do next. Decision-makers need to remember: when sunk costs affect strategic decisions, there can be real and dire consequences.

In El Paso, we embrace the Sunk Cost Fallacy. We live by it. Our “business leaders” and City Management think that all we need is just one more project, a Children’s Museum, or downtown arena, or freeway deck, to make El Paso that new destination, the “new Austin”, that will attract businesses to stanch our brain drain. So we keep pouring tax dollars into those Quality of Life projects, even though the only people whose quality of life has improved are the city bureaucrats. The real estate speculators quality of life hasn’t really improved because they had all the money they needed anyway. They have an itch that can’t be scratched.

Does it sound familiar? I think I may have mentioned the Sunk Cost Fallacy before. Once or twice.


  1. It was I think in 2005 that Wilson as city manager brought the urban scholar, Richard Florida, here to lecture the local movers and shakers on what makes a city attractive. His best selling book, Rise of the Creative Class, was the inspiration for this. He was going to teach us how to make El Paso hip again.

    To paraphrase Florida, urban planners assume that, to attract talent/jobs, what’s important is to provide infrastructure: sports stadiums, freeways, shopping centers, etc. But in fact, creative people prefer authenticity — so making your city just like everyplace else is a sure way to kill its attractiveness. I don’t think we bought his advice. Nothing happens here that doesn’t line the pockets of the Usual Suspects and “hip” isn’t a stadium or an arena that does.

    So, El Paso pursues a strategy of expensive vanity projects and debt rather than focus on basic infrastructure improvement that today includes ubiquitous high-speed broadband (and the ability of citizens to use it effectively), ecological design, and good streets.

    My urban studies have pointed to two major factors that account for a prosperous and vibrant city: educational attainment and citizen participation. Both of these factors are easily measured, too, and if you have them everything else should fall into place, which is not to say you won’t have problems. Need I point to Portland that has enormously educated citizens and vibrant civic participation that now includes burning it down.

    No magic formula.

Leave a Reply

Your email address will not be published. Required fields are marked *