Why did Sadiq Khan change his mind over the Garden Bridge? He's fallen for the sunk costs fallacy

The temptation for a politician who started a war or for a chief executive who gave the green light to a weak project is to pretend that there was no mistake and plough on. It's not rational, but it is understandable

Shakespeare’s Macbeth clearly didn’t know about the ‘sunk costs’ fallacy. “I am in blood stepped in so far that should I wade no more, returning were as tedious as go o’er,” the murderous Scottish nobleman cries, explaining why he would carry on slaughtering in order to cling on to the crown.

It’s a common mistake. Not the slaughtering, but the reasoning. And it demonstrates why the classical economic view of humans as rational decision makers is often very wide of the mark.

When individuals evaluate a financial decision, when a business leader decides whether or not to continue with an investment project, when a politician decides on a policy, they are all supposed to weigh up the costs and benefits dispassionately. And those decisions are supposed to be made on the basis of future potential costs and benefits, not costs from the past.

Anything spent to get to that point of decision should be irrelevant. They are “sunk”, to use the economic jargon. Sunk costs, by definition, cannot make a project a better or worse proposition.

But, like Macbeth in his pool of blood, we find it very hard to avoid looking back. Business leaders will often plough on with dubious investments because they are so emotionally invested in the project.

Fund managers have a tendency to hold on to bad company investments that they spent a great deal of time and effort researching. Football managers will play the hugely expensive striker they bought, even when the player is obviously misfiring.

This is the reason why it’s a bad idea to have any boss in post for too long. They will often be unable to make the decisions to scrap projects that are already up and running, to cut losses.

Politicians are notorious for falling into the sunk costs fallacy. In State Of Denial, Bob Woodward’s book about the US government's disastrous occupation of Iraq, Colin Powell is quoted as saying: “The president says in effect we’ve got to press on to honour the memory of those who have fallen. [So] we’ve got to have more men fall to honour the memories of those who’ve already fallen”. Powell’s ironic description reflected his frustration.

He wasn’t the first to be frustrated. For Iraq, read Vietnam in the 1960s, when Lyndon Johnson committed American troops long after he should have known it was a lost cause. And for Vietnam read the First World War, where the generals carried on sending thousands of men over the top into machine gun fire in the belief a breakthrough had to be imminent. The dynamic is the same.

It’s not rational, but it’s understandable. John Kerry, when he returned from distinguished military service in Vietnam and became an anti-war activist, famously asked: “How do you ask a man to be the last man to die for a mistake?” But the answer was contained in the question. The temptation for the politician who started the war, or committed to its extension, will forever be to pretend that there was no mistake in the first place – and to plough on.

We had a smaller example of the sunk costs fallacy in British politics last week. Sadiq Khan, the front-runner to replace Boris Johnson as London Mayor, came out in opposition to the construction of a new £175m Garden Bridge across the Thames last year (with £60m expected to come from public funds). But last week came a change of heart. “It’s going ahead, it’s got the green light,” Khan said. And why? “The money [spent on the design] is spent. Cancelling would mean we lose that money and have nothing.” Spot the sunk cost fallacy.

How often do we, in our ordinary lives, make decisions heavily influenced by how much effort we’ve already expended on a project? Think of a meal in a rather pricey restaurant. The food turns out to be horrible, but we carry on eating anyway because it was expensive and we don’t want to waste money. How many of us actually walk out of the cinema when it becomes apparent that the film we’ve chosen is god-awful rubbish? After paying £12 for a ticket? You must be joking.

Offices across the country contain people drowning in the sunk costs fallacy. Their work makes them unhappy, but they’ve spent so much time and money to get where they are in their careers that to give up and find something else to do would be too tedious.

This kind of behaviour is hard-wired into our psyches. It can’t be altered by lectures from economists. The psychologists Daniel Kahneman and Amos Tversky argue that it’s reinforced by the mental bias of “loss aversion” – losses are felt much more keenly than potential gains. The greater the size of those sunk costs the greater the psychological pain of changing course.

Perhaps the best we can do is to try to recognise when the sunk costs fallacy is leading us – or those who make important decisions on our behalf – seriously astray.