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What is Sunk Cost Fallacy and How it Affects Our Decisions

Written by Michael Davidson
Michael teaches English in Israel while blogging about how to live a happier and healthier life.
Reviewed by Leon Ho
Leon Ho is the Founder and CEO of LifeHack, the most read productivity, health and lifestyle websites in the world - with over 12 million monthly readers.

Fact Checked. Our dedicated editorial team tirelessly evaluates every article we publish to ensure the information is factual, up-to-date and free of bias.

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Do you think you make smart, rational decisions most of the time? Chances that even if you do make rational decisions, you still occasionally fall for the sunk cost fallacy.

Sunk cost fallacy is a phenomenon where a person is reluctant to abandon or let go of a course of action because of the monetary, physical, or emotional investment done, despite knowing that continuing the course of action is bringing more damage than good.[1]

In economics, a sunk cost is any past cost that has already been paid and cannot be recovered.[2] For example, a business that invested a million dollars into new hardware. This money is now gone and cannot be recovered, so it shouldn’t figure into the business’s decision-making process.

Or, let’s say you buy tickets to a concert. On the day of the event, you catch a cold. Even though you are sick, you decide to go to the concert because otherwise, “your money will go to waste.”

Here are some of the most common sunk cost fallacies we come across and tips on not letting them affect our decisions.

Common Sunk Cost Fallacy Traps

Now that you are familiar with the definition of sunk cost fallacy, here are some common traps we may have fallen for. If you take a moment, you can probably think of all sorts of situations where you make irrational decisions because of the sunk cost fallacy.

Here are a few instances where you are vulnerable to falling for sunk cost fallacy.

1. Eating After You Are Full

I do this one all the time. If I go to a restaurant and become full after eating most of my food, I feel compelled to eat the rest so that it isn’t “wasted.” The pressure to eat also comes from the awareness that nobody else will eat that food after me, and it’ll be just thrown out.

Since I feel uncomfortable letting the food waste, I will continue eating even if I’m full. It’s a sunk cost, and I only lose by gorging myself further.

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2. Watching a Movie You Dislike

It doesn’t matter that you’ve already invested time in whatever media you consume. If you don’t like what you are watching, nothing stops you from walking out of the movie theater or switching to another show.

In many ways, sunk cost fallacy is a mixture of time, effort, and money, and as a result, we may tend to feel guilty for leaving after investing in something.[3]

3. Continuing a Toxic Relationship

Staying in toxic relationships is, unfortunately, all too common.

If you put much emotional investment into a relationship, breaking it off can be very challenging. This can be true of any relationship, not just romantic ones. Perhaps one of your good friends is no longer positively influencing you. Years of emotional investment make it very uncomfortable to cut your ties, but you might have to.

In one study, researchers believe it is natural to cling to our ideas. To want to work day and night to see them through. This is commendable. However, it could be said that in some contexts, the idea of never giving up on something, no matter the costs, is inefficient.[4]

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How Can You Overcome Sunk Cost Fallacy

Here are some ways to overcome the sunk cost fallacy and spend your time more productively.

1. Retreat

Walt Disney once founded Laugh-o-Gram, an animation studio he hoped would be the launching ground for his ideas.[5]. Laugh-o-Gram soon went bankrupt and crashed; undeterred, he founded another studio – Walt Disney Studios. You’ve probably seen some of their work.

For whatever reason, Laugh-O-Gram didn’t have that magic factor that Walt Disney Studios came to have, and again, Walt Disney came to understand this.

Of course, it’s good to be passionate about our ideas, but that passion can leave us blind to real faults. If we take a step back at our ideas and look at them objectively, we may see things that should be changed, or perhaps the idea could be abandoned entirely in favor of a better one to come along.

Ultimately, instead of seeing our ideas as things to fight for, whatever the cost, invest time, effort, and money. We may come to see our ideas and projects differently.

In military history, there are countless stories of armies retreating from battles to win more important, larger battles. There are also stories (think Napoleon’s catastrophic invasion of Russia) of armies heading into battles or campaigns which ended in disaster (Napoleon never recovered from the loss).

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Knowing when to step back and abandon a certain path can help you avoid committing the sunk cost fallacy.

2. Overcome The Fear of Letting Your Efforts Go to Waste

We like to think that our value of things, such as projects or goals, comes from our wish to see them through or perhaps a prediction of their later worth. However, our ultimate attachment comes from a complex web of emotional attachments created not by our views of its worth but by the time and effort already put into it.

In many ways, one of the most powerful aspects of our attachment to things is based on fear of losing that thing as much as our liking or enjoyment. This false attachment based on loss is counted as the sunk cost fallacy.

For example, have you ever played a video game for a while and rebooted it up one day only to discover that the save file has been corrupted? Our frustration here doesn’t come from how it’ll take much longer to see how the game’s story progresses or even the fact that we have to re-play it again; instead, our frustration comes from the time we have spent on the game to amount to nothing.

The pain and frustration we feel when we lose out is the same reason Buddhists avoid forming attachments, as they feel this suffering is inevitable. But this isn’t necessarily the case.

According to research, when the sunk cost fallacy is applied to our goals and projects, it’s easy to see how we can become attached to things that, deep down, we know might not work.[6] Again, we don’t stick with them because we know their worth, we stick with them as we can’t bear to see the loss of it, or specifically, we can’t bear to see the time spent on them amount to nothing.

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In this way, abandoning the idea early on in favor of a better one can be the better option to avoid sunk cost fallacy.

3. Evaluate the Worth of An Event/Action Versus Its Outcomes

In the end, only you will know if or when to give up on something, but here is a short list of things to think about when in consideration.

How Excited Are You About It?

It could be a good idea to deeply examine how exactly you feel about your idea, project, or even current job that you may give up on. Does thinking about it stress you out? When you talk about it, does your mood deflate, and you try to change the subject, speaking enthusiastically about other things?

If it’s causing you stress and unhappiness, then it’s a good idea to consider how much it is worth to you. No idea is worth your health and happiness.

Plus, if you decide to stick with it, this unhappiness will only grow and expand, as deep down, you know the thing you are spending your time on isn’t right for you.

Listen to yourself, and you’ll know the answer.

Ask Yourself “What if?”

By now, you’re probably thinking or saying those immortal words.

  • “What if this idea proves to be a great success.”
  • “What if I am losing out massively?”

We can never be sure of the answer to these questions; that’s why they are so powerful. But one thing we can be sure about is that it is impossible to know the future.

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  • “What if my book idea is the next bestseller?”
  • “What if it’s the next Harry Potter?”

Consider how truly realistic this is. Many successful and published writers only earn a decent living from their books. Every failed book was written by someone who fought hard for it and didn’t give up on it. What if they spent that time on a better book? What if that better book was successful? They never found this out as they spent all their time and effort on a bad idea.

Can Quitting Leave You Financially Better Off?

This is best explained with a gambling metaphor.

How many times have you heard of a gambler putting everything they have into a bet for that gamble to work out, winning big and forever successful? Maybe that has only happened a few times. There are countless stories of gamblers putting everything into a bet and losing everything. Or if they win with the first bet, they lose it all in the second. Once again, the gambler’s commitment to winning, whatever the cost, is the sunk cost fallacy.

It’s the same thing. If you put a significant amount of money into something, only for it to fail, that money is gone forever. That loss is greater still when you see time and effort spent on something as currency.

Who Else is Supportive?

Considering the sunk cost fallacy, it’s easy to see why you might be biased and your thinking is too subjectively bent toward an idea. In this way, getting the thoughts of others can be a better idea. There is no point asking friends because, as friends, they are almost honor bound to tell you it’s a good idea and act supportive. But ask yourself how many people are visibly supportive and enthusiastic about your project or goal.

If there are many people, then, well, you may be a winner. But if there are few, or even nobody, then ask yourself why that is; you might think it’s because they don’t care. But this isn’t the case. The biggest reason they may not be super supportive as they don’t want to see you fail and are trying to hint that what you are working on may not be worth your time.

Final Thoughts

We fall victim to the sunk cost fallacy because we are emotionally invested in whatever money, time, or any other resource we have committed in the past. The most important step to freeing yourself from making poor decisions based on sunk costs is recognizing the logical fallacy. Knowing it will help you tremendously make more rational future decisions.

By reading this article, you’ve already taken that huge first step. But when that isn’t enough, I suggest you write out a pros and cons list. If the only pro of continuing to do something is to feel better about your emotional investment, you should go in the other direction.

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Despite how common this fallacy is, you can see through it fairly easily most of the time.

TL;DR

Don't have time for the full article? Read this.

What is Sunk Cost Fallacy and How it Affects Our Decisions

Sunk cost fallacy is a phenomenon where a person is reluctant to abandon or let go of a course of action because of the monetary, physical, or emotional investment done, despite knowing that continuing the course of action is bringing more damage than good.

Eating when you’re full, watching a movie you dislike, and continuing a toxic relationship are examples of sunk cost fallacy.

Retreat and reassessing your current path can help you prevent sunk cost fallacy,

If you’re excited about your project, then that’s a great indicator to continue on your path; if you feel stressed and unhappy, it’s it may be time to let go of your project.

Featured photo credit: Adrian Swancar via unsplash.com

Reference

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