Sunk Cost Fallacy

Correct Answer: Evaluate future costs and benefits, treating past investments as irrelevant to the current decision

This is a classic example of the sunk cost fallacy - the tendency to continue investing in something because of past investments, rather than evaluating future prospects objectively. The best approach is to evaluate the project based on future costs and benefits only. Since market analysis indicates Phase 2 will likely fail, continuing the project would only lead to additional losses. Past investments cannot be recovered and should not influence the current decision-making process. The other options are incorrect because: - Continuing due to team morale or stakeholder confidence is emotionally driven and not financially sound - Maintaining strategic alignment despite likely failure would lead to more losses and goes against good project management principles - Trying to recover sunk costs by making additional investments when failure is likely would only compound the losses A skilled project manager must make decisions based on future prospects and expected returns, not emotional attachment to past investments. This helps prevent throwing good money after bad and ensures resources are allocated efficiently.

Correct Answer: Sunk Cost Fallacy

The project manager is demonstrating the Sunk Cost Fallacy, which occurs when someone continues an endeavor or investment due to previously invested resources (time, money, effort), despite evidence suggesting that abandoning the current course would be better. This cognitive bias makes people pursue a failing strategy because they have already invested substantially in it, rather than evaluating future costs and benefits objectively. The manager is letting past investments influence future decisions, rather than evaluating the situation based on current conditions and future prospects. The other options are incorrect because: Escalation of Commitment Bias with resource optimization is a similar concept but incorrectly implies that the behavior leads to resource optimization, which it does not. Path Dependency Theory relates to how historical decisions limit future choices, but does not specifically address the psychological attachment to prior investments. Investment Recovery Principle is a fictitious term that does not accurately describe the cognitive bias being exhibited in this scenario.

Correct Answer: Sunk Cost Fallacy

The Sunk Cost Fallacy best explains this situation because it describes the tendency to continue investing resources (time, money, effort) in a project or investment based on past investments, rather than evaluating future costs and benefits objectively. Project managers often fall into this psychological trap by thinking 'we've already invested so much, we can't stop now' even when facing losses. This irrational decision-making process leads to throwing good money after bad. While Prospect Theory relates to risk attitudes in general, it doesn't specifically address the commitment escalation phenomenon. The Escalation of Commitment Paradox is not a standard term - it's merely describing the situation rather than explaining the underlying principle. Strategic Investment Momentum Effect is a made-up term that doesn't exist in standard risk management or behavioral economics literature. The Sunk Cost Fallacy provides the most precise explanation for why project managers continue investing in failing projects, making it the most appropriate answer in this context.