Sunk Cost Fallacy



Let’s talk about cognitive biases: Sunk Cost Fallacy


The sunk cost fallacy is where you continue to move forward with a decision using data points that are no longer relevant. Those data points are the “sunk cost”. It is essentially the tendency to pursue a goal that we committed ourselves to by dumping more resources and money into it regardless of the costs not being recoverable.


We aren’t always rational beings no matter how much we like to think we are. We are often influenced by our emotions and when we have previously decided something is in our best interest—we have a hard time letting go due to regret and guilt around not following through with our commitments. We continue to hold steadfast to our decisions regardless of whether new evidence supports continuation or not. We end up rationalizing our decisions based on past costs rather than present costs + benefits. Loss aversion reinforces this irrationality. As humans we tend to focus on loss rather than gain due to the inborn negativity bias.

For example, if you have been working a certain job for a long time, and a new opportunity shows its head, you may be hesitant to pursue that opportunity because you don’t want to “lose” the time that you’ve invested into the current job. But that time is already spent and irrelevant to your decisions moving forward. That time is a sunk cost and should not be considered in your decision making. The time will not be recovered no matter how much we wish otherwise.

Or maybe you’re a dieter who always binges on certain foods in your pantry, but you can’t bring yourself to throw those foods away because you “spent money” on them and that would be wasteful. Well, the money isn’t coming back, so that’s irrelevant to what you do with the food. We fail to take into account that we can’t get the money back so it is now an irrelevant variable to our happiness.

On the other hand, let’s say you bought an item but realized that you didn’t need it after purchase. The cost of the item isn’t a sunk cost so long as you can return the item because you have the potential to get that money back.


How do we avoid this bias?


One of the primary reasons we fall into this trap is due to the intuitive social framing of humans who fail to follow through with a previous commitments being deemed pieces of shit. Ya. No. Not always. Too much context is left out of that conclusion. Blindly following emotions and conditioning without question often deviates us from rational decision making.


All you can do is consider if your costs can be recouped with an alternative route of action (most of the time they can’t). So evaluating you current costs and benefits is the only rational thing to do. Remember, staying at a dead-end job/relationship instead of leaving for a better opportunity, will not give you time back. The sunk cost fallacy has roots in the avoidance of negative emotional states, so taking emotional variables out of the decision making process can help negate this bias. Focus on concrete actions that will be beneficial for your future and disregard your emotional pull to stay in places you don’t belong for too long.

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