What does the term "sunk cost fallacy" refer to?

The term "sunk cost fallacy" refers to the tendency to continue investing in a project or decision based on the resources already committed, such as time, money, or effort, rather than assessing the current situation and potential future outcomes. This fallacy occurs because individuals feel compelled to justify their past investments, leading them to make irrational decisions. For example, someone might continue to invest in a failing business because they've already spent a significant amount of money on it, instead of cutting their losses and redirecting their resources to a more viable opportunity.

This reasoning can lead to poor decision-making, as the individual is focused on past costs that cannot be recovered rather than evaluating what is best moving forward. Understanding the sunk cost fallacy is crucial because it highlights how human psychology can interfere with rational decision-making processes.