We tend to let irrecoverable past investments influence our decisions, resulting in suboptimal outcomes.

Have you ever stayed in an unhealthy relationship due to the time and effort you had already invested?

Regretted continuing with a project solely because of your previous investments?

Forced yourself to attend an event in bad weather just because you already bought the ticket?

 

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The sunk cost fallacy is our tendency to keep investing resources in something that is no longer rational or beneficial, simply because we have already invested unrecoverable resources in it.

 

This cognitive bias can lead to suboptimal decision-making. It is partly due to loss aversion and can also be seen as a consequence of the consistency principle.

 

For example, entrepreneurs may continue with a venture that is not performing well financially because they have already invested a significant amount of money and effort into it. Instead of cutting their losses and moving on to a more promising opportunity, they continue pouring resources into the failing business because of the sunk costs already incurred, wasting valuable time, money and effort.

 

Sunk costs are expenses you have already incurred and cannot recover. They include time, money,  effort or emotions invested that cannot be reclaimed, such as the money you paid for a non-refundable, non-transferable ticket to a concert. The time you have invested in your studies. Or the effort and emotions you've invested in a romantic relationship.

 

Sunk costs can compel us to persist in activities that no longer serve us because abandoning them means accepting our investment as a loss. The more we invest, the greater the sunk costs and the stronger the tendency to continue. Some examples include:

👉 People may stay in an unhealthy relationship because of the time and effort they have invested. The longer they’ve been together, the harder it is to break up.

👉 Individuals may continue working in a profession they no longer enjoy, such as practicing law, due to the significant time and money invested in their education and training.

👉 Diners at a restaurant may feel compelled to finish a meal they don't enjoy because they paid for it. Similarly, people may continue watching a series or reading a book they dislike simply because they have already invested time in it.

👉 Those who have bought a ticket to a concert may feel obligated to attend, even if the weather on the day of the concert is terrible and they would rather not go.

👉 Countries engaged in an unwinnable war may be unwilling to withdraw their troops, fearing that withdrawal would render the soldiers’ sacrifices in vain. Instead of focusing on future outcomes, these countries may choose a path that leads to even more lives lost. Examples of this are the U.S. military campaigns in Vietnam and Iraq.

 

A rational decision-maker ignores sunk costs when deciding what to do next, focusing solely on future costs and benefits. Instead of dwelling on past investments, you should concentrate on future outcomes. The time, effort, or money you've already invested shouldn't dictate further investment.

 

How to mitigate the negative impact of the sunk cost fallacy

The sunk cost fallacy can cause us to continue investing resources in something when it is no longer rational or beneficial. While guarding against the negative consequences of biases can be tiresome and impractical, it becomes worthwhile when the stakes are high.

 

⚒️ Become aware of the sunk cost fallacy

Awareness of the sunk cost fallacy's potential adverse influence is the first step in mitigating its impact.

 

When making an important decision that could be swayed by previous investments, take a step back to examine whether the sunk cost fallacy might be negatively affecting your choice. Consider asking yourself the following questions:

🤔 If I were starting from scratch today, would I still make the same decision? Evaluate the decision as if the sunk costs do not exist. This approach can help you detach emotions from past investments and focus solely on the merits of the decision at hand.

🤔 Am I primarily considering what I've already invested rather than future costs and benefits? Check whether you're focusing more on past investments (sunk costs) rather than objectively assessing the potential future costs and benefits of continuing with the decision.

🤔 Have I set clear criteria for evaluating the decision? Establishing objective criteria helps ensure that decisions are based on rational considerations rather than emotional attachments to sunk costs.

🤔 Is this decision truly aligned with my needs and goals, life purpose and personal values? Assess whether the decision aligns with what you genuinely want or need, separate from any past investments made.

 

If you recognise that the sunk cost fallacy may be influencing your decision negatively, take steps to mitigate its effects, allowing for a more objective evaluation of your options. 

 

⚒️ Focus on future costs and benefits

When making decisions, shift your attention away from past investments that cannot be recovered and towards optimising future outcomes. Focusing on future benefits and costs enables you to make more rational and forward-thinking choices, irrespective of sunk costs.

 

Here are the key steps involved in this process:

👉 Identify the potential benefits that may be gained by continuing with the endeavour.

👉 Identify the potential costs associated with continuing with the endeavour. Consider financial costs, time commitments, and any potential negative consequences that may arise in the future.

👉 Evaluate whether the potential benefits outweigh the potential costs involved.

👉 Compare the potential future outcomes of continuing with the current endeavour against alternative courses of action. Assess whether there are alternative paths that offer greater potential benefits or lower costs.

👉 Based on the evaluation results, make a decision that prioritises future outcomes over past investments. Choose the option that offers the greatest potential for achieving your goals and objectives in the long term, regardless of sunk costs. Of course, the chosen option should align with your life purpose and personal values.

 

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We often persist in investing resources in something that is no longer rational or beneficial simply because we've already committed irrecoverable resources to it. However, focusing on future benefits and costs allows for more rational and forward-thinking decision-making, irrespective of sunk costs.

 

References

Recognizing the Sunk Cost Fallacy May Help You Cut Your Losses, Psychology Today, Veronika Tait Ph.D.

 

How Susceptible Are You to the Sunk Cost Fallacy?, Harvard Business Review, by David Ronayne, Daniel Sgroi, and Anthony Tuckwell

 

Why are we likely to continue with an investment even if it would be rational to give it up?, The Decision Lab

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