Hi!
Picture this: You're sitting in a packed movie theater, eagerly waiting for the film you paid good money to see. The opening scenes roll, but 20-30 minutes later you realize with growing disappointment that the movie is a snooze-fest.
Do you leave to do something else or do you stay and endure the remaining 60 minutes of the film?
This is a simple example of the topic we’ll explore in this post: The sunk cost fallacy
What is the sunk cost fallacy?
The sunk cost fallacy is a cognitive bias that most of us tend to fall into, and it consists of basing our decision-making process on the resources we have invested in the past, rather than the outcome we can expect in the future.
And when we talk about “sunk costs” it refers to any resource - like time, money, effort, emotions, etc - that has been invested in the past and is now unrecoverable.
So, if these costs are already gone, meaning that despite the decision you make, you won't get them back; then it's not optimal to consider them went deciding, the rational choice focuses on the path that you believe will bring about the results you want most efficiently and effectively, and nothing else.
And failing to do this will ultimately end up with you making decisions that go against your own best interest for both your personal and professional lives, it’s like finding yourself in a hole, but instead of climbing out, you dig in deeper. And sometimes it might seem harmless, like the movie example at the beginning, but it can have dire consequences.
What if you stay in a relationship that is bad for you just because you’ve been together for a long time, or maybe you decide to stay in a career path that’s not the right fit for you only because of the time and effort you’ve put into it in the past, or refusing to abandon a project or business venture that is consistently failing, believing that the initial investment justifies persisting despite poor outcomes… You get the point.
What causes it?
This phenomenon has been well studied in the field of psychology and behavioral economics, and here are some of the elements that feed into it:
Loss aversion: In most of our minds the idea of losing something is more powerful and has a higher weight in our mind than the idea of gaining the same thing, thus, we often put more effort into avoiding losses rather than seeking gains.
Framing effect: This happens when people make decisions based on whether the options are framed positively or negatively. In the case of the sunk cost fallacy, we can consider following through with our previous choices as a success, even if this is the worse option.
Optimism Bias: This means that we tend to overestimate our chances of winning and underestimate the ones of losing. This keeps us investing more resources into a project, convinced it’ll go our way, even if it’s likely that won’t be the case.
How to avoid the sunk cost fallacy
The good news is that for anyone out there that’s struggling with this cognitive bias, it’s absolutely possible to overcome it. And although it can be challenging, here are a few techniques that will make it easier:
Be aware: Understanding this concept is probably the most important first step, it will help you recognize situations where you may be inflicting this bias on yourself and be more skeptical of your instincts by knowing how they can often be wrong.
Define success and failure from the start: Having a clear idea of what it is that you are aiming for and a limit to how many bad outcomes you are willing to stand before you pull the plug from the very beginning will make the decision-making process a lot simpler.
Have regular reviews: Set a time every week or month to sit down, think, and check the progress you’ve made toward a goal; it could be as simple as asking “What has gone well?” and “What has gone bad?”. Based on this you need to determine if you stop, adjust, or keep going with the same approach.
To sum it up, the sunk cost fallacy can lead us astray by making us cling to past investments instead of focusing on future outcomes. But there's hope! By being aware of this bias, setting clear goals, and regularly reviewing our progress, we can break free from its grip. Remember, it's never too late to prioritize what truly matters and make decisions that align with our best interests. So, let go of sunk costs and embrace a future of smarter choices. You've got this!
As always, I hope you’ve found this helpful. Have a great weekend!
-Alan