Understanding Sunk Cost and Conjunction Fallacies in Decision Making

Decision-making is a critical skill that we employ in almost every aspect of our lives. However, often we fall prey to cognitive biases that can cloud our judgment. Two common biases that can significantly impact our decisions are the sunk cost fallacy and the conjunction fallacy. Let's delve into what these biases are, how they work, and why they matter in our daily lives.

The Sunk Cost Fallacy

The sunk cost fallacy, also known as the escalation of commitment, occurs when we continue to invest in a failing plan or project because we have already invested time, money, or effort into it. This misplaced belief that the prior investment justifies further expenditure is a fallacy. The sunk cost, or the resources already invested, cannot be recovered and should not factor into future decisions.

Examples and Implications

For instance, imagine you have lost $1000 playing poker. The logical move would be to take the loss and walk away, knowing that continuing to play increases the chances of losing more. However, you might rationalize that you need to keep playing to ‘recover your money’. This belief that the previous expenditure is ‘yours’ and needs to be recouped is the sunk cost fallacy. In reality, the expected outcome remains the same, whether you have already lost $1000 or not.

A more tangible example involves a car that frequently breaks down. If an individual has already spent $2000 on repairs and a buyer offers to purchase the car for $500, which is its blue book value, the owner may hesitate to sell. They argue that they can't justify parting with the car given the amount of money already spent on repairs. This is again a case of the sunk cost fallacy, as the money spent cannot be recovered and should not influence the decision to sell the car.

The Conjunction Fallacy

The conjunction fallacy arises when we believe that the probability of two or more events happening together is greater than the probability of one of the events happening on its own. This cognitive bias often stems from stereotyping, where we make assumptions based on preconceived notions about a person or group.

Classic Example and Interpretation

A classic example of the conjunction fallacy is the Linda scenario. Imagine that Linda is described as follows:

31 years old Single Outspoken and very bright Majored in philosophy Deeply concerned with issues of discrimination and social justice Participated in anti-nuclear demonstrations

When asked, 'Which is more probable?'
1) Linda is a bank teller, or
2) Linda is a bank teller and is active in the feminist movement.

Many people choose option 2 because it seems more specific and thus more likely. However, from a probability standpoint, this is incorrect. If the first statement is false (Linda is not a bank teller), then the second statement cannot be true either, as it includes the first statement.

Understanding the Logical Fallacy

The conjunction fallacy is a formal fallacy, meaning that it violates the rules of logic. The specific error lies in assuming that a more specific event is more probable than a less specific one. This is inherently incorrect because the probability of two events happening together (the conjunction) is always less than or equal to the probability of either event happening alone.

Real-World Implications

The conjunction fallacy can have significant consequences in fields such as finance, healthcare, and any domain where decisions are based on probabilities. It’s crucial to examine our assumptions and ensure that they stand on their own, without being influenced by irrelevant conjunctions.

Conclusion

Understanding and recognizing the sunk cost and conjunction fallacies can significantly improve our decision-making processes. By separating past investments from future decisions and avoiding irrational assumptions, we can make more logical and effective choices. Awareness of these cognitive biases is a step towards better judgment in both personal and professional contexts.

References

1) Tversky, Amos, and Daniel Kahneman. "The belief in the law of small numbers." Psychological bulletin 90.2 (1981): 313.

2) Kahneman, Daniel. Thinking, fast and slow. Macmillan, 2011.