The Sunk Cost Fallacy — Know and Save Yourself

Don’t make decisions only based on your emotions

Imagine you are writing a book for the last two months on a topic. You were very passionate in the beginning and thought it would be an amazing book to write. But when you already completed one-third of the book, you’ve found that you are not enjoying writing this anymore. You have a better idea in your mind than this.

Now, what will you do? Will you abandon writing the book or continue anyway as you have invested so much time and effort beforehand?

The Sunk Cost Fallacy

Richard Thaler, a pioneer of behavioral science, first introduced the sunk cost fallacy, suggesting that “paying for the right to use a good or service will increase the rate at which the good will be utilized” (1980, pp. 47)

A sunk cost refers to the money, time, or effort that has already been spent on anything which cannot be recovered. In our example, it is the time and effort already made for writing the book.

It means the cost will remain the same regardless of your present decision. You may stop writing the book or continue it only because you have invested much time in it.

Now the sunk cost fallacy is your tendency to follow through on an endeavor, in our example — writing the book, as you have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.

Say you have bought a movie ticket for $10. But after watching the first fifteen minutes, you’ve understood that it’s not the type you enjoy. It seems quite boring, and you want to leave the cinema hall.

But as you have invested already the money and time, you decided to stay till the end. In this case, you’ve become the victim of the sunk cost fallacy.

So, the sunk cost fallacy means making a choice not based on what outcome you think is the best — but instead based on the desire not to see your past investment go to waste.

Save Yourself from the Sunk Cost Fallacy

Always keep in mind that the sunk cost cannot be recovered. It can be your money, time, and effort, but when it’s gone — it’s gone forever. And you don’t have to consider it to make your current decision. Here, most people do the opposite and fall victim to the sunk cost fallacy.

When you have spent 10 dollars on a movie, it’s gone — you cannot get it back. So, when you find the movie boring, you can decide to leave the cinema hall and save your valuable time. That’s the more rational thing to do than watching a boring movie you dislike, only thinking about the money you spend on it.

The sunk cost fallacy happens because, in most cases, we are not rational decision-makers and are easily influenced by our emotions.

We don’t want to admit that we can make a wrong choice because we don’t want to feel guilty or regretful. So, we continue to hold our past decisions, though the new situation and evidence suggest that it’s not the best course of action.

Not just individuals, big corporations, and governments fall victim to the sunk cost fallacy, and they don’t want to feel guilty. So, they continue with the decisions they made in the past. But in the long run, it ruins their growth and development, and they lost their money, time, and effort altogether.

To save yourself, you need to be aware of the sunk cost fallacy and focus on the current and future costs and benefits instead of the past investments or commitments.

The Sunk Cost Fallacy Experiments

Psychologists Hal Arkes and Catherine Blumer conducted several experiments and showed that people were influenced easily by the sunk cost fallacy in their decision-making.

In a questionnaire study, they asked the participants to imagine that they had spent $100 on a ski trip to Michigan and later $50 on a ski trip to Wisconsin, without realizing that the tickets were for the same weekend.

They were told they thought they would enjoy the Wisconsin trip more. Participants were then asked which of the ski trips they would go on if it was too late to return either ticket.

54% of participants said they would go on the Michigan trip, despite the fact that the rational choice would be to go on the ski trip that would be most enjoyable because costs are lost either way.

Arkes and Blumer concluded that over half of the participants chose Michigan because they had made a greater initial investment, providing evidence for the sunk cost fallacy.

To Conclude

The only way to save yourself from the sunk cost fallacy is to take your emotions out of your decision-making. Admit that you sometimes take decisions that may turn into the wrong ones.

Judge your present situation and take decisions based on the opportunities at hand and the future benefits you may get from these — not based on the money, time, or effort you have invested in the past.

Try to be rational (not emotional) when you take any decision and make the best out of it.

Thank you for reading.

References 1) Bondarenko, P. (2015, November 23). Sunk cost. Encyclopedia Britannica. https://www.britannica.com/topic/sunk-cost 2) Arkes, H. R., & Ayton, P. (1999). The sunk cost and Concorde effects: Are humans less rational than lower animals? Psychological Bulletin, 125(5), 591–600. https://doi.org/10.1037/0033-2909.125.5.591 3) Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60. https://doi.org/10.1016/0167-2681(80)90051-7

If you are interested to read more of my article, you may read the following one published in The Masterpiece.