The Concorde Debacle: A Warning Against Investing More Due to Previous Expenses
The Concorde Fallacy, also known as the sunk cost fallacy, is a common yet costly mistake that can lead to poor decisions in various aspects of life, including business, relationships, and personal finance. This cognitive bias encourages individuals to persist with an investment, be it financial, time, or resources, based on past investments rather than the current or future value of the investment.
One of the most compelling examples of the Concorde Fallacy can be found in the history of the Concorde supersonic airliner, a joint project between British and French governments. Despite being one of the most expensive aircraft ever built, the Concorde was also very fuel-inefficient and never achieved commercial success [1]. The governments continued to fund the Concorde for many years due to the sunk cost fallacy, having already invested a significant amount of money into the project.
In the business world, the Concorde Fallacy often manifests in several ways. For instance, a company might continue to fund a failing engineering project or product development because of the substantial initial investment, despite clear evidence that the project’s prospects are poor [1][2]. Another example is when managers hold onto underperforming business units or investments because they are emotionally or financially attached to past decisions [2].
The Concorde Fallacy can also be seen in stock and investment decisions. Investors may refuse to sell losing stocks, hoping to "break even," despite market signals that the stock is unlikely to recover. Instead, they may even buy more shares of the failing stock, compounding losses [4].
To avoid the Concorde Fallacy, it's crucial to make decisions based on current or future value, rather than past investments. Seeking advice from trusted sources can help in this regard. Being realistic about expectations and conducting an objective assessment of a situation can also prevent the Concorde Fallacy from taking hold.
The Concorde Fallacy can lead to misallocation of resources, delayed adaptation to change, wasted time and effort, and even emotional distress. For instance, a manufacturer might stick to an outdated production method because of the large investments in machinery, even as competitors adopt more efficient technologies [1][2]. A business owner investing in an unprofitable product line is another example of the Concorde Fallacy.
In everyday life, the Concorde Fallacy is evident in situations like a gambler continuing to bet after losing all their money or a person in a relationship staying with an abusive or unfaithful partner.
In conclusion, the Concorde Fallacy is a costly mistake that can lead to poor decisions and financial losses. To avoid this pitfall, it's essential to focus on current and future value when making decisions, rather than being swayed by past investments. Objective assessment, seeking advice, and being realistic about expectations can help in decision-making and prevent the Concorde Fallacy from causing unnecessary waste and emotional distress.
References: [1] Ariely, D. (2008). Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollins Publishers. [2] Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), 263-292. [4] Thaler, R. H. (1980). Toward a Positive Theory of Addiction: The Case of Stock-Market Speculation. The Journal of Economic Perspectives, 4(3), 175-190.
- In the realm of personal finance, individuals may continue to hold onto loss-making investments, such as stocks, under the influence of the Concorde Fallacy, hoping to recover their losses while ignoring market signals revealing a unlikely recovery.
- To prevent making poor decisions in business and personal finance, it is important to regularly evaluate the current or future value of investments rather than being swayed by past investments that prove unsuccessful.
