Have you ever wondered if it is worth standing in the queue for buying tickets or investing a lot of time or more resources (money or human) in something that suffered losses or did not go according to plan? This is a common phenomenon called the “Sunk Cost Fallacy”. Here, one continues to invest in the project or the decision irrespective of the outcome.
Sunk Cost in economics means a cost that has already been incurred and that cannot be recovered. For example, if you invested $100 for a concert, whether you can make it to the concert or not, the $100 is a cost that you cannot recover. The $100 spent on the concert is a sunk cost. Fallacy means a mistaken belief or a misconception that renders one’s argument null.
This is a cognitive bias where you continue to invest in a project, idea or plan despite it going down just because you have invested a significant amount of resources into it. This phenomenon happens as we value the resource we have invested higher than the resource we have on hand. The resource could be anything time, money or effort. We do this as many of us tend to show an aversion to loss and we do not want to admit loss. We also tend to develop emotional attachments to the resources we have invested in.
Let me give some examples of sunk cost fallacy I have experienced personally. We were A-list members of AMC theatres which allows us to watch 3 movies a week and enjoy further discounts on popcorn and other condiments. The cost of the membership was 20-odd dollars. I felt that we should watch a minimum of 3 movies a month to make up for the cost of the membership. Sometimes we ended up watching worthless movies. What I did not realize was that I could have put that time to better use and ended up spending more on condiments which I could have avoided. The realization of opportunity cost in something else and the sunk cost of membership would have helped me make a better decision. Now as a family, we are trying to make better decisions and trying our best to not fall into this trap of the “Sunk cost Fallacy”. Professionally, we have seen many companies like Nokia, Blockbuster and many others continued to invest in what they believed is the best rather than being realistic and futuristic causing their downfall.
How could one avoid this phenomenon?
Recognize the phenomenon: The first step in avoiding the trap is to recognize and acknowledge this phenomenon. Be aware of the resources you have already invested in and objectively check if further investments in the current failing project would prove fruitful or not.
Do not get too attached: Think practical and act rational. Just because you invested your resources in something it does not mean that you have to hold on to that forever. Businesses are meant to grow and investments are supposed to make you feel happy. If you know that the investment is not yielding the desired results, pause, think and validate if further investment is worth it rather than making an emotional decision.
Focus on What’s next? If you are not sure if future investments of resources on the previously made investments can make your idea/plan/relationship better, it is better to move on. Rather than brooding over the past, move on and look for benefits in other options by cutting the losses.
Seek an external input: Seeking an external input might help bring a different perspective. It might bring more clarity when your assumptions are challenged. Their thoughts and ideas can help you make a more objective and rational decision.
In a nutshell, the sunk cost fallacy is a bias that can make us stick to a losing cause and continue to invest in that as we are emotionally connected to the previously invested resources. There are ways to avoid falling prey to this phenomenon by recognizing, seeking external input and focusing on what’s next.
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