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A sunk cost, also known as retrospective cost, is an expense that cannot be recovered by additional spending.
The sunk cost fallacy is an error that occurs when an individual makes a decision taking sunk costs into consideration, which often leads to irrational decisions.
For instance, someone may sit through the entire movie even though they are not enjoying it, just because they have paid for the ticket.
Another example of this is when an investor holds on to a loss-making stock in the hope that it will eventually start giving profits.
There are many explanations behind this psychology, one of them being loss aversion, or trying to avoid losses. In most cases, this type of thinking leads to further losses.
Another reason is the commitment bias, which makes people stick to a plan just because that plan was made in the first place.
Some people try to avoid ‘wasting’ investments already made by continuing to invest more in them. By doing this, they end up ‘wasting’ more resources.
Sunk cost fallacy can be avoided by focusing on future benefits instead of past investments and making rational decisions based on current value.
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