Outsmarting the Sunken Cost Fallacy
Making Wise Choices in Unprofitable Situations
“One of the most commonly cited human irrationalities is the sunk-cost fallacy, in which people continue to invest in a losing venture because of what they have invested so far rather than in anticipation of what they will gain going forward.” —Steven Pinker
The Sunken Cost Fallacy is a cognitive bias that occurs when we throw good money after bad.
We may convince ourselves to stay in an unprofitable business venture or keep pouring time and resources into an unsuccessful project because we have already invested so much. It’s like trying to get a sunken ship out of the ocean by throwing more cargo onto it — there’s no point, but our minds can trick us into doing it anyway.
The Sunken Cost Fallacy is an insidious trap that can cost us if we let it control our decision-making.
The Psychology Behind It
The basis for the sunken cost fallacy lies in our aversion to losses.
Our minds attach more emotional weight to losses than gains. It’s why we often suffer from FOMO (fear of missing out). And are so keen on avoiding regret that we stay stuck in situations like the ones I’ve described.
It’s also essential to distinguish between sunk costs and opportunity costs. The latter is an expense we still need to incur but would have to pay if we chose one option over another. We don’t feel emotionally attached to these potential expenses, making them easier to weigh than sunk costs.
Some common misconceptions about the sunken cost fallacy include believing it only applies to monetary investments or is the same as a sunk cost.
This bias isn’t experienced only in business matters but in everyday life. We might stay with a toxic partner or keep watching a movie we don’t enjoy because of our initial investment.
The sunken cost fallacy is an irrational bias that can influence our decision-making in any context with an initial investment.
It’s also not limited to losses — potential gains may sway us if they involve projects we’re already invested in.
"No matter how far you've gone down the wrong road, turn back." —Turkish proverb
Examples of the Sunken Cost Fallacy in Everyday Life
We encounter the sunken cost fallacy in everyday life more often than we think.
Here are a few examples:
You’re watching an unbearably boring movie but refuse to turn it off because you’ve already paid for it.
You sign up for an expensive gym membership but don’t ever use it — so you keep paying the fees even though you know it’s money down the drain.
You buy a ticket for a concert, only to find out that the artist isn’t performing — and yet you still decide to attend anyway.
You get the point!
The sunken cost fallacy is a powerful cognitive bias that can drive us to persist in unprofitable situations despite all odds. And it pays to be aware of it!
Taking an objective look at our investments and weighing their potential losses versus gains is the best way to bypass this dangerous trap.
If you’re ever tempted to stay stuck in a bad situation, remember: your investment may be lost, but you don’t have to be!
How to Avoid Falling Prey to the Sunken Cost Fallacy
The Sunken Cost Fallacy may not seem like a big deal. Still, it can have serious consequences when our decisions are based on emotion rather than logic.
Take, for example, the stock market, where investors often cling to stocks that have already lost value because they don’t want to admit that their investments weren’t sound. Taking a step back, assessing the situation, and making decisions based on facts rather than past investments are essential. This will save us time, money, and effort in the long run!
Though it can be difficult, the best way to avoid falling prey to the sunken cost fallacy is to make decisions based on profitability and benefit rather than emotional attachment or guilt.
We should also be aware of our biases and double-check our choices — if they don’t make sense, it’s likely because we’re letting our emotions dictate them.
Another helpful tip is to practice mindfulness when evaluating our choices.
Acknowledge the potential losses and gains without getting too attached to either one. And take a long-term view of the situation. We can also consider involving an impartial third party who won’t have any emotional attachment to the situation in question. Their input may provide valuable insight.
“The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.” —Daniel Kahneman
Mastering Our Emotions Is Essential to Prevent This Bias
Managing our emotions is vital to avoiding the sunken cost fallacy. We all make mistakes, but how we respond to them will determine if they become lessons learned or missed opportunities.
When evaluating investments and making decisions, remember: emotionally-driven choices are rarely a good idea!
Instead, look at each one, weigh the potential losses and gains, and don’t let past experiences blind you from current ones.
In conclusion, the Sunken Cost Fallacy is a cognitive bias that can prevent us from making intelligent decisions.
We should be aware of our emotional attachment to our choices and strive to make decisions based on facts rather than feelings. Or at least conscious of those feelings.
Taking an objective view of the situation and evaluating potential losses versus gains can help us bypass this dangerous bias.
© 2023 Alejandro Betancourt. All Rights Reserved.