City residents convened a town hall meeting in a small town to discuss repair options for a statue in the city center. The figurine was already considered an eyesore. Now, with its broken arm, it bordered on grotesque. A fierce debate ensued between the residents on whether to keep or remove the sculpture. Ultimately the city decided to repair the statue, citing the thousands of dollars that had previously gone into commissioning and installing it in the first place. If ever there was a case of good money chasing bad money, this was it. Or, as behavioral psychologists and economists like to call it, a classic case of sunk cost fallacy.
What is sunk cost fallacy?
Sunk cost fallacy is a cognitive bias. It is our tendency to continue an endeavor or behavior simply because of our previously invested resources (money, effort, or time).
Consider these scenarios:
- Feeling compelled to watch episode 38 of a 45-minute Netflix show you no longer enjoy (plot twists now border on crazy) because you’ve already invested 1665 minutes (37*45) minutes of your life on the show.
- Feeling obligated to go to a concert or a game despite being sick because you paid $150 for the ticket.
- Standing in the ride line at Disneyland for hours in the sweltering sun, with your cranky 8-year-old, just because you spent close to a month’s rent on this vacation.
- Not interrupting a software installation that has taken two days already!
- Cluttering your closet with clothes (price-tags intact) you bought pre-pandemic before the work-from-home lifestyle caused a 15lb weight gain (aka, the Covid-15.)
Do the above examples sound familiar?
With just a few minutes of reflection, I bet you’ll quickly find more items to add to the list of good resources chasing bad.
While the examples above have relatively minor consequences, our gullibility to fall victim to the sunk cost fallacy can have some significant repercussions.
I recently read a letter sent to a magazine’s relationship advice columnist. The author of the letter was unhappy because her ten-year-old relationship right after college was stagnant. But she felt compelled to stay with her boyfriend and stick it out since she had already spent a decade with him. Was she signing up for a potential lifetime of unhappiness to protect the decade she had already spent, or should she cut her losses now and move on? Tough choice, right?
It isn’t just us, individuals, who are extraordinarily susceptible to the sunk cost fallacy.
Large corporations, organizations, even governments fall for this cognitive bias.
Remember the Concorde supersonic jet that was grounded forever in 2003? Even when the Concorde project showed clear signs of failure and was plagued by time and cost overruns, the British and French governments continued to pour money and time into the venture. Their justification? The millions of British pounds and the years of effort already invested in the project.
So, why exactly do economists and psychologists harp about sunk costs so much?
Why we should ignore sunk costs
Sunk costs are irrelevant because, in true, rational decision-making, you should only factor future costs to weigh future benefits.
We’ve had many spectacular technological breakthroughs in the last couple of centuries. Unfortunately, a time machine is not one of them. We cannot change the past. Yet, in denial, we continue to factor previously expended resources to influence our current and future decisions.
Sunk costs are irretrievable. Already spent resources are not going to change the future outcome. But we continue with the status quo because we previously invested resources.
Refer back to the examples listed at the beginning of the article. Although it would be in our interest to stop watching a TV series we don’t enjoy or not go to an event when we’re sick, we don't. Because, a part of our brain does not want previously incurred costs go to waste.
Our decision-making, in other words, is the opposite of rational. Yet, we do it because we are humans, not econs.
Why we struggle to let bygones be bygones
We are capable of many different cognitive biases. But our gullibility to fall for the sunk cost fallacy, in particular, is quite extraordinary.
Why do we place so much emphasis on sunk costs?
Waste not, want not
Sunk cost fallacy is an unintended consequence of an otherwise good tenet— “waste not, want not.”
We’ve been ingrained from childhood to be less wasteful (with guilt trips, as a bonus.) I’m sure I can speak for most when I say we’ve all heard some version of this: “By throwing away and not finishing the food on your plate, you are robbing a child in sub-Saharan Africa of a meal.” Unfortunately, if you’ve already gorged enough, forcing the extra food down your throat to avoid waste sets you up for other ailments.
Yes, it was a bad decision to put too much of your food in the first place, but just because you made one wrong decision is no reason to make another one.
While the food on our plate is almost a very literal example of waste, we employ the same reasoning to avoid what we consider waste in many situations.
It all comes down to our remarkable (and somewhat irrational) tendency to apply abstract rules to all sorts of situations. Scientists call this overgeneralizing.
In a research study, behavioral psychologists Arkes and Ayton state that while human adults are prone to the sunk cost fallacy, such behavior cannot be found in lower animals or children. Wait, what? This means we—adult human beings—make poorer quality decisions than animals below us in the food chain!
So, much for our supposed superiority. Ironically, the one thing that makes us superior to other animal species—the ability to reason—is precisely what gets us into a pickle in the first place. We overgeneralize the abstract rule of “waste not”. We apply it to all sorts of situations, including ones where the rule does not make any sense.
Here’s a snippet from the same research paper:
It is humbling to consider what lower animals would think of humans if their experiments demonstrated our vulnerability to the sunk cost effect….At least some comfort can be taken from the fact that they would be able neither to articulate nor to overgeneralize their findings.
Translation: “If a dodo were to conduct a research study, it would find out how stupid we humans really are. Aren’t we glad dodos cannot conduct such studies?”
Another reason we fall victim to the sunk cost fallacy is our ego. Admitting to others or even ourselves that our past action was a failure is not easy to do. It threatens our credibility and could cause others to lose their trust in us and our decision-making.
Admission of error goes directly against our other long-hold maxim—we’re always right.
Unfortunately, the consequences of proffering a mea culpa can be pretty serious, especially if you are in a position of power. This is why it’s easier for most to continue to beat a dead horse rather than admit mistakes.
When faced with a situation where we have to weigh losses against potential gains, we tend to avoid loss than seek out potential gains. This is referred to as the loss aversion theory.
Loss aversion is evolutionarily wired into us. If our ancestors had to weigh the choice of foraging in a new forest for more food while risking being eaten by a lion, their preference would be to forgo the second serving at dinner. Survival (to reproduce and propagate the species) always trumps over fulfilling whims!
Using the sunk cost fallacy to our advantage
So far, we’ve discussed the negative connotations of sunk costs. But there is a silver lining (got to look hard, though).
Though sunk costs are hard to ignore, through reverse psychology, we may be able to use the sunk cost fallacy to our advantage. In essence, we can turn our cognitive lemons into lemonade.
Pick an otherwise good, positive habit and invest resources—time/money/effort into it. Start to create your own sunk costs. Soon, you may discover that your inherent bias towards sunk costs helps keep your positive habit going.
I have used this technique quite successfully in my own life, albeit somewhat unintentionally.
I started a habit streak of closing three rings on my Apple watch every day. This is a good habit to cultivate because it encourages physical activity and movement throughout the day. It gets me off the couch.
I set out with an initial goal of closing the rings for 30 continuous days, then slowly incremented it to 60 days, then six months, and then a whole year. A few days ago, I hit the 500-day mark.
Now, I’m invested in the habit streak. I have too much-sunk cost in this project. Not keeping up with this streak is expensive for me mentally. The best part? My cognitive sunk cost bias now works in my favor. Because, no matter what, I’m motivated to keep my habit streak going, even when I feel like being a sofa spud.
The lesson: create sunk costs for behaviors or endeavors that are good for you.
Plans were made. Flights booked. Hotels reserved. Invites sent. This was all before the pandemic hit. The couple planning their destination wedding had one of two choices to make. Continue with the plans and hope for the best because too many resources were already sunk into the project? Or, change the destination wedding plan to avoid risking potentially catastrophic health consequences?
Economists and psychologists tell us not to fall for the sunk cost fallacy. They suggest we make rational decisions by ignoring sunk costs and focus only on analyzing future costs/benefits. They tell us there is really no need for any of us to spend this much time in the past (unless you are a history teacher!)
Like most good advice, this is easier to give than take.
That said, we can do our best to be prospective rather than retrospective when decision-making. That will require us to admit we make mistakes. (Yes, I know. I’m referring to those rare instances.)
And there’s a silver lining. We can use our cognitive sunk cost bias to drive positive life changes. How? Start sinking resources (time, money, or effort) into a positive project or venture you’re finding hard to commit to. Once you start gaining momentum and build enough sunk costs, your bias will do the heavy lifting for you! Wouldn’t that be great?