The Sunk Cost Fallacy: Part 3 - Hawaii

Vacation Decision and the Sunk Cost Fallacy

Imagine you’ve booked an extravagant vacation for $10,000. You’ve planned it for months, you’re excited about the trip, and everything is set. However, just days before you leave, a local event in your hometown comes up that you don’t want to miss. The event is important to you—it could be a unique opportunity, a special occasion, or something that has personal significance. The catch is, attending the event costs very little, perhaps a few hundred dollars, and it’s something you could easily fit into your schedule.

Now, you're faced with a decision:

• Option 1: Go on the vacation, because you’ve already invested $10,000 into it.

• Option 2: Skip the vacation and attend the event, which costs less and aligns better with your current interests or needs.

The Sunk Cost Fallacy at Play

The sunk cost fallacy comes into play when you feel compelled to go on the vacation because you’ve already spent the $10,000, even though there’s a better option in front of you (attending the local event). This fallacy is driven by the emotional attachment to your previous expenditure, and it causes you to disregard the more rational decision of attending the event that costs far less but provides significant value to you.

Here’s why the sunk cost fallacy leads to poor decision-making:

• Emotional attachment: You might feel that not going on the vacation would be like "wasting" the $10,000. Even though the money is already spent and cannot be recovered, the thought of losing that investment makes you lean toward going on the vacation, even if it’s no longer the best choice for you.

• Focus on the past: Instead of focusing on the value of your options now (the local event vs. the vacation), the sunk cost fallacy keeps you anchored in the past—on the money you’ve already spent.

In reality, the $10,000 is a sunk cost. It is an expense that cannot be changed, whether you go on the vacation or not. What truly matters are the current benefits you’d gain from each option. The vacation might offer great experiences, but it’s not worth $10,000 if attending the local event, which costs a fraction of that, would provide more value to you at that moment.

A Rational Decision Based on Future Benefits

To avoid the sunk cost fallacy, you need to focus on the future benefits of each option. Ask yourself:

• Which option provides the most value now? Does the vacation still offer more enjoyment, or does the local event hold more immediate importance to you?

• What are the opportunity costs? By attending the event, you would be missing out on the vacation. But is the vacation truly worth $10,000 now that new information has surfaced? Would the local event provide a more fulfilling or valuable experience in the short term?

In this scenario, applying your theory would suggest that you should make the decision based on what’s best for you now, not based on what you’ve already invested. If the local event offers something that feels more valuable to you, then you should attend it, even though it means walking away from the $10,000 vacation.

Example of Applying Rational Thinking

Let’s say the event in your hometown is a once-in-a-lifetime conference related to your business or a personal interest that could open doors to new opportunities, and it would cost you just $300. In comparison, the vacation, while nice, is more of a relaxing escape with no additional personal or professional benefits.

If you were to apply the sunk cost fallacy, you’d feel compelled to go on the vacation because you don’t want to “lose” the $10,000 investment. But the rational decision is clear: the conference, even though it costs only a fraction of the vacation, may provide you with long-term benefits that the vacation cannot. It could potentially lead to new business opportunities, new personal connections, or future returns that outweigh the temporary enjoyment of the vacation.

By going to the conference instead of the vacation, you make the choice that aligns with future returns, not past expenditures.

What Would a Rational Person Do?

A rational person, following the principle of your economic theory, would disregard the $10,000 spent on the vacation (since it’s already gone) and focus on what would bring the most value in the present moment. In this case, if attending the local event provides better future opportunities or aligns more with your current interests, then the rational choice is to skip the vacation and go to the event.

Conclusion

The sunk cost fallacy leads many people to make decisions based on what they’ve already spent, rather than on future returns. In the vacation example, the $10,000 spent on the trip should not influence the decision-making process. Instead, focus on what will provide the most value moving forward. Whether it’s going to the vacation or attending the local event, the best decision should be based on what aligns with your goals and priorities at the time, not on past investments.

By understanding and applying this principle, individuals and businesses can make better decisions, avoid the sunk cost fallacy, and focus on future returns rather than being emotionally tied to previous expenditures.