The Sunk Cost Fallacy is one of the more frequent delusions which clouds our judgment.
Sunk costs are outlays of time, money, or effort that we’ve already made; and because they’ve already been made, we can’t get them back. They’re a thing of the past–they’re sunk.
The Problem with Sunk Costs
The thing is: we pay too much attention to sunk costs. We fret over the time we’ve invested, the money we’ve spent, the effort we’ve put in. This leads to poor decisions.
If you’ve ever found yourself staying for the entirety of a movie in the theater even though you think it’s terrible, then you know exactly what we’re talking about.
The Sunk Cost Fallacy is why, if we buy a movie ticket for ten dollars, many of us feel like we have to stay for the entire movie. The ten dollars we spent on that movie ticket is gone the minute we buy the ticket. Whether we stay for the whole movie or leave fifteen minutes in, we’re still out ten bucks.
Supersonic Jets and Poor Decisions
An example many researchers use to illustrate the Sunk Cost Fallacy is the Concorde Supersonic Transport project. The Sunk Cost Fallacy is sometimes referred as the Concorde Fallacy because of this oft-cited example.
The French and British governments wanted to make these really fast, supersonic airplanes that could fly across the Atlantic Ocean in under four hours. But this project was really expensive, and in the middle of it, they realized that it wasn’t going to pay off. They weren’t going to make much money from it, but they continued to sink money into the project anyway on the grounds that they had already invested a lot of money.
The French and British governments made a mistake here: they paid too much attention to sunk costs when deciding whether or not to continue with the project.
They were never going to get their initial investment back, so what they should have done is: ignored those sunk costs.
It’s worth mentioning that Sunk Costs don’t have to involve money–they’re just as real with non-monetary things too.
We can fall into this trap when we continue to wear a pair of shoes that make our feet hurt solely because we spent one hundred dollars on them.
But we also fall into this trap when we stay in a relationship solely because we’ve already spent three years of our life with that person.
Why do Sunk Costs plague our decisions?
The sunk cost fallacy seeps into every aspect of our life, and because of this, it’s worth asking the question: why does this happen?
I think there are two main reasons.
- We don’t want to appear as wasteful.
- We don’t like losses.
Let’s take a look at the first: We don’t want to appear as wasteful.
Anytime we stop investing our resources, we feel like we’re admitting that everything we’ve already invested has been wasted. Some of us might feel like our job is terrible, but that we may as well continue with it because we’ve already put in so much work. To quit would make it seem like we’ve wasted a portion of our life.
We don’t like that.
Now, let’s think about the second: we don’t like losses.
If we’ve already paid for something, we feel like we have to do it, even if a better opportunity comes up.
Imagine we bought a ticket to concert for one hundred dollars. Then the night before the show, a friend calls us and offers us a free ticket to a broadway play. We can only go to one of them. When making the decision on which event to attend, I think we’d have a harder time missing the concert we paid one hundred dollars for than we realize, even though we might prefer the broadway play.
This is because, as Richard Thaler explains it, “Paying one hundred dollars for a ticket to a concert that you did not attend feels a lot like losing one hundred dollars.”
This idea, that we don’t like losses, along with our desire to not appear as wasteful, is why we weigh sunk costs so heavily.
What should we do about Sunk Costs?
Now, the message here is not: quit everything. It’s worth sticking some things out.
The message is: Ignore sunk costs.
Don’t base your decisions off of the time, money, or effort you’ve already invested.
We can’t get sunk costs back. All we can do is look at the resources we currently have, and invest them wisely. We shouldn’t get too caught up in an idea or a project because we’ve spent lots of our time, money, or effort on it.
We would all make better decisions if thought a little less about the resources we’ve already spent and if we thought a little more about where our future investments of resources might be most effective.
Feel better about quitting a book one hundred pages in if you’re not enjoying it.
Ignore sunk costs.