You're a hundred pages into a 300-page book you've purchased. Its characters lack complexity; the setting is banal; a plot line can hardly be distinguished, and as soon as one seems to emerge, it dissolves into a muddled, hardly believable sequence of non-events. In short, it's bad. But you paid $22.95 for it, and you're already a third of the way through—you can't stop reading now...you've already invested too much.
Economists characterize this line of thinking as the "sunk cost fallacy." The "sunk cost" part is self-explanatory, referring to the resources—money, time, materials, effort—that cannot be clawed back: the time has already slipped away, the non-refundable deposit already spent, the raw ingredients already used. The "fallacy" bit is less obvious, but understanding just how and why people convince themselves to commit even more fully to things that are likely to offer only deteriorating value is key to anticipating and adjusting bad human economic habits.
Consider the lousy book dilemma. A perfect actor would know just the economically rational thing to do: get rid of the book and find something more worth the time. But perfect actors we are not. Studies have consistently shown that the majority of people, whether engaged in something as harmless as stubbornly tolerating poorly written literature or as harmful as accumulating massive gambling debt, cannot bring themselves to cut their losses and move on. Thus the experience of the fallacy.
To uncover what's behind this behavior, economists must turn to psychologists, whose insights into the human mind can help explain irrationality. Working together, they have found that sunk costs play on both intrinsic (mentally internal) and extrinsic (social) pressures. Intrinsically, we do not want to disappoint ourselves or be made to feel like we've wasted what's already been spent. Extrinsically, no one desires to be made the fool: admit defeat, and everyone will know you've done something imprudent.