Which term best describes the decision to continue a failing project due to prior investment?

Which term best describes the decision to continue a failing project due to prior investment?

• A. Sunk cost fallacy
• B. Status quo bias
• C. Irrational continuation
• D. Loss aversion

Answer: (A)

The main idea here is recognizing a bias where past investments unduly influence whether you should continue a project, even when the future looks unfavorable. This is the sunk cost fallacy: you justify continuing because you’ve already spent time, money, or resources, treating those irrecoverable costs as if they should force you to persevere. In rational decision-making, only future costs and benefits matter for the choice ahead, since the sunk costs cannot be recovered anyway. So even if a project is failing, letting what’s already been spent dictate ongoing commitment is a biased move rather than a sound one. Status quo bias would push you to keep things as they are simply because they’re familiar, not specifically because you’ve invested before. Loss aversion is about avoiding losses in general, which can contribute to staying in a bad situation, but the more precise name for using past expenditures to justify continued investment is the sunk cost fallacy. Irrational continuation is not the standard term used for this concept.

The main idea here is recognizing a bias where past investments unduly influence whether you should continue a project, even when the future looks unfavorable. This is the sunk cost fallacy: you justify continuing because you’ve already spent time, money, or resources, treating those irrecoverable costs as if they should force you to persevere. In rational decision-making, only future costs and benefits matter for the choice ahead, since the sunk costs cannot be recovered anyway. So even if a project is failing, letting what’s already been spent dictate ongoing commitment is a biased move rather than a sound one.

Status quo bias would push you to keep things as they are simply because they’re familiar, not specifically because you’ve invested before. Loss aversion is about avoiding losses in general, which can contribute to staying in a bad situation, but the more precise name for using past expenditures to justify continued investment is the sunk cost fallacy. Irrational continuation is not the standard term used for this concept.