The Sunk Cost Fallacy: Why Letting Go Can Be a Good Thing

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.

A short video on sunk cost fallacy

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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Together Everyone Acquires More

There was a student appearing for their examination. The student flunked so bad in the tests and thus began the root cause analysis for his/her performance. The parents pointed to the teachers, the teachers pointed to the tutors and the tutors to the parents. Setting their arguments aside, they decide to go in for a combined effort. The student comes out with flying colours and scores a very high grade. Again, the parents pointed to the teachers, the teachers pointed to the tutors and the tutors to the parents. But this time it was about praising each other and their contribution to the success of the student.

““The strength of the team is each individual member. The strength of each member is the team.”

— Phil Jackson

In a more relatable example, we have seen many like Ronaldo, who have put themselves above the team and we could see the impact it had on the team. Though Ronaldo scored 24 goals in the 2021-22 season, the team played with no identity and lost track of their target. Although it has been up and down this season, Manchester United has been playing like a team. Working for their teammates and fighting as a team is reflecting in the way in which the team plays. Manchester United’s goal is to be the ultimate joy to their supporters, aka their customers, and seeing my beloved side play as a team has given us hope to dream bigger again.

What is the relevance of about the above mentioned stories and how can this help us? I have encountered so many obstacles in my corporate journey so far and one tough nut that is always tough to crack is making people realize the benefits of working as a TEAM. The word TEAM itself expands to give a very good motivating phrase “Together Everyone Acquires More“. Only when the Designer, the manufacturer and the salesperson are in sync the profits of the Car industry can be multiplied. In the case of the IT industry also only when the Product Manager, Project Manager, Developers and Quality Assurance Engineer are in good sync the product shapes up well to satisfy the customer. No one is lesser than the other and no one is bigger than the other. But yeah the man who finances the thing has to take the top spot. All that matters at the end of the day are delivering a good product to the customer that they would use and help us learn from their interactions with the product. That can be achieved only when we think and work as a “TEAM“.