The challenges in South African mining provide an interesting case study of the "sunk cost fallacy", a behavioural bias in which we honour sunk costs, which are irrelevant to decisions that should be based on future costs and benefits. A "sunk cost" is a cost that has already been incurred and cannot be recovered.Past investment in South African mines is "sunk" in more than one sense. A mine shaft cannot be moved to a more favourable location or sold for significant scrap value.Falling commodity prices present a major problem. Policy uncertainty makes it hard for mining companies to make long-term decisions. The government and unions seem reluctant to adjust their demands, and mine productivity is hampered by inflexible labour regulations. Labour and electricity costs continue to escalate faster than inflation.story_article_left1Conditions have deteriorated to the point where a number of mines are running out of money and credit and are having to raise new capital to repay debt and sustain their operations.This is where the sunk cost dilemma comes in - for boards and fund managers.To take three examples:• Over the past decade, Harmony's Kusasalethu mine has gobbled up over R1.5-billion. In that time, the mine's annual gold production has fallen by more than 25%, despite capital expenditure being ramped up.Are the distressingly large sunk costs of the past clouding the Harmony board's judgment on the future costs and benefits of continuing to operate the mine?• Lonmin has been bailed out twice by shareholders over the past seven years and has come to the market again with a third rights issue.Its issued share capital has expanded from 156million shares in 2008 to more than 580million shares.Despite the influx of new capital, its production has declined and its market capitalisation has dwindled to R2.2-billion, a fraction of its 2007 peak of R94-billion.With the benefit of hindsight, fund managers should have written off their initial investment in Lonmin as a sunk cost and declined to provide new capital.A third bailout will prove hard to justify unless one is confident of drastic improvement in the company's operations or in platinum prices.• Glencore recently provided an example of walking away from sunk costs by allowing its Optimum Coal subsidiary to be placed in business rescue.Glencore bought Optimum at a valuation of R8.5-billion in 2011, and advanced over R900-million from September 2014 to fund its losses. It was clearly hard for Glencore executives to admit defeat in such a public way, but they may well have made the best decision for their shareholders.Of course, estimating a South African mine's future costs and benefits is made very difficult by volatile commodity prices and exchange rates, the operational gearing inherent in a mining business and policy uncertainty.Thus, a decision on whether to pump more money into a loss-making mine, or to walk away, is fraught with uncertainty. Shareholders and management could arguably improve their decision-making by considering these points:story_article_right2• Closing loss-making mines does not merely save the company from future losses, it also reduces supply to oversupplied commodity markets. Reduced supply may result in higher commodity prices (or a weaker rand), which translates into incremental profits in the mines that survive.• If Lonmin stops producing, that would be good for platinum prices and the remaining platinum mines.• Fund managers who argue that current platinum prices are unsustainably low should be careful not to frustrate their own arguments by providing even more capital to keep the high-cost producer in business and the platinum market oversupplied.• Closing a mine is terrible for the mine's employees, their families and communities. When mines are closed, it becomes less likely that their resources will ever be mined again . These resources could arguably be mined for the profit of the country, its people and the mining companies for many more years if we had a more favourable policy environment. But we do not, and there is little evidence that it will improve soon .• In that case, why should savers and pensioners (whose investments are exposed to these mines) have to bear the cost of delaying the inevitable?• Lastly, honouring sunk costs can be seen as rational for people trying to save face. This is particularly true for agents (company directors and fund managers). We should all try our hardest to put aside personal ego and make decisions in the best interests of the principals we represent.Liddle is Allan Gray's chief investment officer. This is an extract from Allan Gray's Quarterly Commentary..