Final answer:
Loss aversion explains why people may vote to continue funding a partially completed, costly project due to their heightened sensitivity to perceived losses compared to gains.
Step-by-step explanation:
The phenomenon being described in the scenario where people vote to complete a building that has already cost a considerable amount but requires significantly more funding to finish is best explained by loss aversion. This concept suggests that people experience the pain of a loss more intensely than they value a gain. The decision to continue funding a costly project can be influenced by the desire to not perceive the initial investment as a loss. Thus, when faced with the decision to either abandon the sunk costs or invest more to potentially recover from the loss, people tend to favor investing more due to the strong desire to avoid recognizing a loss.
Behavioral economists Daniel Kahneman and Amos Tversky highlighted the impact of loss aversion in their 1979 article, indicating that a $1 loss is emotionally more impactful than a $1 gain. This insight is important in understanding human behavior in financial decisions and investing, where people might make decisions that appear irrational, such as overreacting to stock market losses more than gains, but are consistent once one understands the psychological factors influencing these choices.