TOEFL Speaking Task 3

The Sunk Cost Effect refers to the tendency of individuals to continue investing in a decision or project based on the amount of resources (time, money, or effort) already committed, even when continuing is no longer rational. This bias occurs because people are reluctant to waste past investments, leading them to ignore future costs and benefits. The effect is common in business, personal decisions, and even public policy, where decision-makers often 'throw good money after bad' rather than cut their losses.

Professor: Consider a real example from the business world. A company spent $5 million developing a new smartphone, but just before launch, they discovered a major design flaw that would require an additional $2 million to fix. Fixing it would delay the launch by six months, and by then, competitors would release better models, so the phone would likely sell poorly. The rational choice would be to abandon the project and accept the $5 million loss. However, the CEO, citing the large investment already made, decided to spend the extra $2 million to fix the flaw. In the end, the phone launched late, sold very few units, and the company lost even more money. The CEO fell victim to the sunk cost effect, focusing on past spending rather than future prospects.