Okay folks, buckle up — we’re going on a little trip…
Between 1969 and 2003, Britain and France invested more than $1.5 billion in the Concorde jet, an aircraft capable of transporting passengers from London to New York in less than three hours. Unfortunately, the plane was very costly to operate and plagued by many high-profile accidents.
The Concorde ultimately fell victim to the sunk cost fallacy—the belief that sunk costs (in this case, the billions of dollars invested in developing and building the Concorde) should be considered when making future decisions.
In reality, investors could have saved billions if they had abandoned their efforts once they realized the project was a dud. But this cognitive bias is more common than you might think, and it might affect how you make financial decisions with your hard-earned cash.
What is the Concorde Fallacy?
The Concorde Fallacy (or sunk cost fallacy) is the tendency to continue investing in something because you have already invested so much in it, even if it is no longer a good investment.
Imagine you buy stock in a popular large company. As the economy shifts over time, the value of the company decreases, but you continue to hold the stock and invest even as the price plummets because you fear losing out on your original investment. This is an example of sunk cost fallacy in action.
In this case, the sunk cost is the price of the stock. So even though it would be better to leave early and avoid wasting more time on the crashing stock, the Concorde Fallacy leads you to stay, losing you more money in the long run.
It is important to remember that sometimes, sunk costs are irrelevant to the decision-making process. Once an expense has been incurred, it cannot be changed, so there is no point in continuing to invest more time or money.
How to Avoid Sunk Costs
You can avoid the Concorde Fallacy by focusing on the future and only considering the costs and benefits of the current situation rather than remaining hung up on past decisions. This will help you to make better decisions and avoid wasting time and money on projects that aren’t profitable.
You can also consider sunk costs in terms of time. For example, imagine you spent many years and lots of money to obtain a law degree. After a few years of practicing law, you realize you aren’t happy in your career.
Because you can’t get your time or money back, it doesn’t make sense to continue being unhappy in your career – your law degree is a sunk cost. Instead, consider embarking on a fulfilling career path that will bring you contentment in the future.
Avoiding the Concorde Fallacy is critical to making informed decisions in every aspect of your life, whether it’s finances, careers, or relationships. Ultimately, the best thing you can do is make peace with your past decisions and move forward with the wisdom you gained from your experiences. Understanding the psychology of decision-making is critical for your well-being, particularly when it comes to your finances.
Need more support? Julep pairs psychology with financial management techniques to help you change your money mindset.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.