Thursday, December 31, 2009

Fallacies (1) – sunk costs

The fallacy of sunk costs is one of dozens of common fallacies. A fallacy is any example of “[p]lausible but invalid reasoning.” Many fallacies have been known since ancient times.

The fallacy of sunk costs is the consideration of spent time or spent money as a factor in a decision.

For example, an investor holds 500 shares of a stock, and is trying to decide whether to sell the shares. The shares have lost 40 percent of their value since he bought them. He would like to sell in order to invest the proceeds elsewhere. He would also like to hold the 500 shares until he regains the value he has lost. So, he is torn.

But the amount he has lost in the past, however painful it may feel to him, is irrelevant. It should not be a factor in the present. He should consider only the likely future performance of the shares as compared to the likely future performance of the other investment he could make if he liquidates the shares.

For more detail on the fallacy of sunk costs, read this easy-to-follow article by business coach Paul Lemberg.

Here’s an excerpt:

Sunk costs are sunk.

They are gone.

They are spent.

The assets you’ve created may have some surplus value, like unused inventory. Or they may have salvage value [like gold in a shipwreck]… But in many cases the value of your sunk costs is a tiny fraction of the original price.

The Takeaway: Remember that clear writing presupposes clear thinking. Try to avoid fallacies such as the fallacy of sunk costs. Best wishes for the New Year.

1 comment:

  1. I'll have to add that to my list of fallacious reasoning. Good critical thinking follow rules of logic to observe, interpret, apply, and revise ideas or problems. Check out these rules of logic and a great list with examples of fallacious reasoning: