Found yourself in a situation where you repeatedly make poor decisions and later realize that you have wasted time and money on something?
Have you heard of military projects where significant funds are being invested, but the continued investment may not lead to desired outcomes?
Welcome to the fallacy of sunk cost!
Learn about the cognitive bias known as sunk cost fallacy — what it is, how to avoid it, and why it’s so important.
Understanding The “Sunk Cost Fallacy“
Sunk cost fallacy causes people to make irrational decisions based on their prior investments. It refers to our tendency to justify the resources we’ve already invested in something and thus continue down a certain path despite evidence that it may not be the best choice. This can include tangible investments (such as money) and intangible ones (like time).
What if you’ve already bought an expensive ticket for a concert? Even though you’re no longer interested in attending, you’re more likely to still go because of the sunk cost of the ticket. Essentially, you or the individual would believe that since you have already invested heavily into the ticket, you should attend the concert to avoid “wasting” the money already spent.
However, this mindset, while understandable, is only sometimes rational. Considering the present and future costs and benefits of attending the concert is important. For instance, if attending the concert will mean missing an important work event or spending time with loved ones, it may not be worth it.
Moreover, the concert is not of interest. In that case, attending may lead to dissatisfaction and disappointment, negating the ticket’s sunk cost.
Therefore, making decisions based on current information and the present value of potential costs and benefits is crucial rather than letting past investments dictate one’s choices.
This often happens when people don’t want to feel like they’ve wasted their resources. So instead of making a rational choice based on current facts, they are driven by guilt or pride.
Exploited And Exploiters
Individuals who are guided more by emotions than rationality while making decisions often fall prey to the sunk cost fallacy. This group of people comprises those who avoid taking risks due to fear of failure or success, people who do not want to perceive themselves as having wasted their resources, and even individuals who feel proud of their prior investments.
On the other hand, the individuals or entities that exploit the sunk cost bias are typically large organizations, institutions or corporations that can benefit from it. For instance, an airline company may profit by encouraging you to purchase more flights despite having already invested money on a previous flight due to the sunk cost fallacy. In order to keep you engaged, they may resort to strategies like increasing cancellation fees or offering discounts which make pulling out financially disadvantageous and compel you to continue with their services.
Day-To-Day Sunk Cost Fallacy
- Holding on to a bad investment and putting more money into it despite its poor performance, hoping it will eventually pay off.
- To refuse to pull out of a project after investing considerable resources into it for fear of losing face or the feeling of wasted effort.
- To continue to eat at a restaurant even when the food is terrible and the service is poor due to having already paid for the meal.
- To continue using an outdated car because you have already spent hundreds on accessories and repairs.
- Keep up with an ineffective workout routine because you paid for a gym membership or personal training sessions upfront.
Recognizing When You Are Slipping Into The Sunk Cost Fallacy Trap
To identify when you might be falling into the trap of sunk cost fallacy, it becomes important to ask yourself questions like:
- Is this decision based on future potential or past investments?
- Would I make the same decision if I were starting from scratch?
- Am I ignoring long-term losses and justifying my decision based solely on short-term gains?
- How much time and money have you already invested in this project, and is that amount worth continuing to invest?
- What impact would be cutting your losses now have on future decisions and overall success?
Overcoming The Sunk Cost Fallacy
Analyze and review your decision-making periodically so that you can see how you are reasoning objectively.
Separate the current spending from past investments by forgetting what has been done or writing off those expenses as learning lessons for the future.
Make sure to consider all of your alternatives before investing time or money into something.
Avoid getting emotionally invested in decisions; instead, look at them logically and rationally to make the best choice possible with all of the information available.
Try to estimate all future costs as accurately as possible and consider whether they are worth it when compared to potential benefits etc.
Reevaluate a project if its progress is going slower than initially expected, and ask yourself if continuing would offer any return on investment.
Consider intangible aspects such as happiness and satisfaction when making decisions rather than focusing only on financial returns.
Final Thoughts
My friend Tara had been eagerly waiting for weeks to try out the new chain of cafes in town. She had heard that their confectioneries were absolutely divine and had been recommended by many. So, one day after work, she decided to visit the café with a couple of her colleagues and order their specials. As she took a bite of the first pie, her face fell. It was not what she had expected at all.
Tara felt disappointed and angry. She had spent money to get them for herself and spent even more time visiting the place. She wondered if she should finish eating the pie because she already had her time and money for it.
Though it was not enjoyable, Tara subconsciously tried to justify her initial investment by continuing to eat the pie. But at the same time, she knew that continuing to eat something unpleasant would only lead to further disappointment.
Finally
So is it still worth it to continue eating the tasteless pie? This experience highlights the significance of being aware of the sunk-cost fallacy, which can impede our ability to make sound decisions by distorting our perception of what constitutes a worthwhile investment.
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Reference
The above article is based on the book Thinking Clearly; this article is here to help us learn and understand how our minds can be tricked by something called cognitive biases.