Is the Sunk Cost Fallacy Actually Smart Business?

Any student of economics knows this basic rule, which states that rational agents should not take irrecoverable or “sunk” costs into account when making decisions about present or future investments. Nevertheless, human beings break this rule all the time, succumbing to a cognitive bias known as the “sunk-cost fallacy.”

If you have ever sat through a bad movie because you did not want to “waste” the money you paid for the ticket or finished a PhD program you lost interest in years ago because of all the work you had already done, you have made this mistake.

But what if this behaviour was not always a mistake—what if, in certain situations, this “fallacy” were actually an optimal decision-making strategy?

Human beings—even rational ones—have a limited capacity to remember the original reasoning behind their decisions. If that capacity is exceeded, the information could be lost—so we need a mental placeholder that can remind us of why we decided something, just as tying a string around your finger reminds you that you need to pick up milk on the way home from work. This kind of ad hoc “memory device” is called a mnemonic.