Posts Tagged ‘sunk cost fallacy’

The inverse of the sunk cost fallacy

This post is an extension of my thinking from yesterday’s post on how donors and BINGOs may sometimes prematurely pull the plug on an otherwise successful project which stubbornly refuses to graduate to full independence / self-sufficiency.

In the standard version of the sunk cost fallacy a donor who has already started a project that needs more money will be biased towards adding further funds, even if the project is turning out to be a bit of a dud. To an outsider they are chucking good money after bad, but to the insider they feel already invested in this project and reluctant to accept the loss on it (loss aversion). To an economist this is irrational behaviour.

However, in the longer term, this fallacy appears vulnerable to inversion in aid projects. When there is an a priori expectation that a project should become self-sufficient after a certain period of time there is an understandable frustration on the part of the donor if the final step always seems just too hard to take. It is true that a bit of tough love might be just what the project management needs, but that has to be a very careful judgement. If a donor has spent several million dollars setting up a project which now only costs $50,000 a year to keep going then I think they are guilty of equally irrational behaviour in pulling the plug (assuming the project is otherwise successful!), and yet I’ve heard exactly such discussions take place.

So much for economic rationality!

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