[FOUNTAIN]Sunk costs can lead us to bad decisions

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[FOUNTAIN]Sunk costs can lead us to bad decisions

Once you start a project, you might be reluctant to give up on it because of the money you have spent on it. Such irreversible spending is called “sunk costs.”
For example, you spent 1 billion won on designing a building whose construction cost would be several tens of billions of won. But the economy suddenly froze, and you no longer see any profit in completing the building. As an investor, you have to choose whether to stop the construction and give up the design costs or stick to the plan and complete it. Theoretically, it is more reasonable to lose 1 billion won and call it quits now. But you are only human, and you might feel like staying with the construction because of the sunk costs.
A similar dilemma could happen in romance. After dating several years in college, you might begin to wonder whether your current boyfriend or girlfriend is the one. Then you could decide to get married for the sake of the time you spent together. But the real reason might be that you might not be able to find a new love or cannot afford to start a new relationship. The time and energy invested on the relationship, i.e., the sunk costs, could justify your feelings.
But business specialists recommend that you not cling to the sunk costs in decision-making. The sunk cost could be grounds to justify a bad decision. Also, sunk costs are irreversible, but they are often misunderstood as an investment. An investor might be mislead; if he keeps on investing, he might be paid off someday. The decision itself is wrong, and he is expecting an outcome that cannot be.
In 1985, an American psychologist, Hadley Arkes, pointed out after psychological tests that 50 percent of personal decisions were influenced by the sunk costs, and psychological research after Dr. Arkes’ study proved that organizations were attached to sunk costs more than individuals were. When a consultative group or a committee makes a decision on a large investment project such as dam or road construction, it can be easily swayed by sunk costs.
In this sense, it’s for the best that the Constitutional Court ruled the special law on the relocation of the capital unconstitutional. We are lucky that we can give up the relocation plan before sinking too much money. There is no need to expend extra social sunk costs by arguing over the decision of the court.


by Nahm Yoon-ho

The writer is head of the family affairs team of the JoongAng Ilbo.

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