Ever since I heard about the sunk cost fallacy I knew it was something many people needed to know about for two reasons; 1. I know for sure lots of us are suffering from it unknowingly. and 2. Even if you aren’t currently entertaining this fallacy it’ll give you some strong food for thought for future decisions that you have to make. So let me walk you through everything you have to know about the sunk cost fallacy so you can start making better decisions.
What is the Sunk Cost Fallacy?
Before I give you the definition of the sunk cost fallacy I want to inform you that this effect goes under a couple different names. It’s other names are Sunk Cost Effect or Concorde Effect. However they all very much refer to the same economic psychological concept. Let me explain the definition of the other concepts and names that I just mentioned in order to make the definition of the concept at hand easier.
First you have to know what a fallacy is. The definition of fallacy is a mistaken belief that is usually based on ungrounded arguments. In easier terms it means a belief that has come to exist based on crooked reasoning, kind of a 1+1 equals 5 situation.*
Next we have the Concorde effect, which is quite a big stretch from sunk cost fallacy and sunk cost effect. The name Concorde comes from history actually so we’re taking a slight detour from psychology, because it is helpful to know as this is a situation that we could find ourselves in. The Concorde effect comes from the British and French government who kept pouring money and resources into the aircraft ‘’Concorde’’ believing it would benefit the project, even if that was no longer the case.
Now after all this background information what exactly is the sunk cost fallacy?
The definition of the Sunk Cost Fallacy is: the tendency to do something or continue doing something because you have already invested in it no matter how big the cost.
You basically continue to do something because you have already paid for it and don’t want to lose your investment. In our reasoning, continuing seems absolutely smart and a reasonable thing to do. However if you think about it logically the actual wise thing to do is to cut your losses, because if you continue you will only be creating more losses instead of a or any substantial gain. The costs you’re trying to regain should be considered sunk to the bottom of the ocean, in other words you can’t get them back and using your investment as a replacement of getting it back usually ends up impacting you negatively more so than positively.
Examples of the Sunk Cost Effect
An example of the sunk cost fallacy is: You bought a vacation package for €2000 however the area you are going to went into semi-lockdown because of the modern plague (Starts with C.. ends with 19.). Instead of postponing your vacation you decide to still go, knowing full well that most amenities are closed, purely because you have already paid for your trip.
If you had decided to cut your loss on the vacation time off and accepted a voucher for another vacation at a later point in time you could have had a better time.
I’ll give you another example of the sunk cost effect that happened to me not too long ago. I had (have-ish) an inflammation in my right arm. Meaning being on the computer was not good for me, but I was right in the middle of updating the life coaching packages so stopping that process was of course not done. A prime example of falling prey to the sunk cost fallacy because had I stopped working so much my arm would heal faster and enable me to get back to work which is all I wanted in the first place.
You should have already seen this coming but as soon as I took a step back my arm started healing rapidly (also thanks to my physiotherapist!). Once the healing had advanced enough I could go ahead and finish updating the packages as swiftly as I desired.
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What The Sunk Cost Effect Is Not
The Sunk Cost effect cannot be confused with giving something one more chance. Even though you are most likely pouring more resources into something when giving it one more chance there is a usual expectancy that the chance of working out is higher because of previous knowledge. While when the sunk cost effect is driving you the costs are basically definitely higher than any future gain.
The big difference and thus also the takeaway is that the chance of success is there when giving something one more chance with the sunk cost fallacy it most likely is not. Regaining what you put in by giving it more chance is close to zero when operating under the sunk cost fallacy. This is very important to note.
The Sunk Cost Fallacy in Psychology
The sunk cost fallacy places itself in a hybrid of economics and psychology. The field that looks into this is behavioral economics which specifically looks at how people make decisions regarding their economic situations. This is done on an individual level but also grand institutions such as on a government level.
You can believe that there is much more to buying your favorite snack or another black sweater than just simple desire but that is a conversation for another day.
Driving forces of the Sunk Cost Fallacy
Even though psychology is crossing paths with economics it doesn’t mean that the sunk cost fallacy operates alone within the sole realm of psychology. As with, I think it’s safe to say, basically everything in psychology, it doesn’t operate alone. There are three forces that are greatly intertwined with the sunk cost effect that we can *very* cautiously call them driving forces of the sunk cost fallacy. These forces are:
- Loss aversion
- Opportunity cost
- Framing effect
Loss aversion
Loss aversion is the feeling that the impact of a real or potential loss is greater than an equal gain. This effect is entangled with the sunk cost effect because when following the fallacy you are trying to make sure that you don’t lose your already made investment. I think this is best made clear with an example.
An example of loss aversion that you have probably been through but never truly noticed is with gaining and losing money. The feeling of finding €5,- in your pocket is great, if we quantify it you went up 10 points in feeling good. However let’s say the next day you reach back in your pocket and notice that you lost the €5,-. Upon discovering your loss you go down -30 in feeling points. So even though you gained and lost an equal amount of money the way you feel about losing it is not equal to the happiness when gaining it.
Opportunity Costs
Opportunity Cost is what you can gain when you take the opportunity presented to you. However the fallacy in this is that people keep looking at how they value what is offered to them even when what they are getting will benefit them more.
An example of the opportunity cost not being properly calculated is: you need a ride to the airport. Someone is offering hour long cab rides to the airport for €10,- a ride but you would offer it for €30,-. In this scenario you would not take the offer as the value you give the fare for the ride doesn’t align with the value it has even though the €10,- ride would benefit you.
So instead of letting something go, in this case driving yourself to the airport, you keep it or keep doing it and thus forgo the opportunity, in this case not having to drive yourself, low cab fare and not having to pay for parking at the airport. This brings us back to the sunk cost fallacy of you continuing to pour into something not beneficial to you in this case mostly because you miscalculated the opportunity costs.
Framing Effect
Framing effect is not only entangled with the sunk cost fallacy but also with the opportunity cost. Framing effect is the way something is stated affecting the way you decide on what the best course of action is going to be.
If something is stated in a more positive way people tend to choose the option that cuts the risks in the best way, thus in a way accurately considering their opportunity cost when it pertains to sunk cost matters. When something is stated in a negative matter for a negative outcome either way people tend to be more risk seeking and opt to choose for the more risky option. When this is the case the sunk cost fallacy will get you as you will be choosing the option that will cause you to not cut your losses and thus not save you in the end.
How The Sunk Cost Effect Affects You
I wouldn’t bring this topic to your attention if it didn’t affect you in some kind of way. Yes, even the ones with the strongest of mindsets. Don’t worry we’ll dive into that in a bit. Let us first start with the most obvious ways the sunk cost fallacy is affecting you.
Sunk Cost Effect In Decision Making
A grand part of the sunk cost fallacy is decision making and not just any decision, a decision that will eventually if not immediately save you a lot of personal resources. In essence the sunk cost fallacy comes down to seeing and knowing when to cut your losses. It is a decision you have to make based on what has happened and trying to predict what can happen from there. The trouble starts when you don’t realize that you have more to lose from continuing than you do from stopping.
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An example that is heard nowadays is knowing or discovering that a career path is not for you but still continuing into year four of a five year degree for it. The reason for continuing is ‘’it’s just two more years and then I’ll have the diploma forever’’. It’s exactly statements like these that are examples of you falling prey to the sunk cost fallacy.
While the statement is true ansich there is a lot of reasoning that has to be brought in, in order for it to also make sense. Things that are not being considered are the time needed to invest to obtain a position in the actual desired career field, the fact that having the diploma does not mean that you will end up using it, the money for the new academic year and the time commitments that come with another year of school. That’s a lot of things not properly being looked at in favor of only looking at the fact that it’s “only” two more years to finish the five year program of something one does not really want anymore. All in order to not lose the three years already put in.
The sunk cost fallacy in decision making is a hard one to negate because a lot of the ways we fall prey to it are so socially acceptable. Because let’s be honest here finishing the last two years after having already put three years in made sense to you before reading on, right? You sank right in with your eyes open.
Mistakes and the Sunk Cost Fallacy
Ever heard of the saying:
‘’Don’t Cling to a Mistake Just Because You Spent a lot of Time Making it.”
– Aubrey De Graf
It’s basically a warning for the sunk cost fallacy. Time is also an investment that you can’t get back, thus it makes sense that you would not want to lose the time you put into something.
Realizing you made a mistake is painful in some way or another. Wanting to salvage anything that can be salvaged from it is a natural response. However, trying to do that is causing you to cling to something that you should let go. Sometimes in order for you to succeed in salvaging something from the mistake, it’s not going back and seeing what you can take with you but it’s salvaging yourself from putting more time in. So salvaging your future.
The Sunk Cost Fallacy in Relationships
Personally I have read the quote by Aubrey De Graf most when it came to matters to do with deciding whether or not to stay in a relationship after coming eye to eye with some truths about the other person. It can be hard to walk away in situations where the heart is also involved, whether it be platonic or romantic.
We humans are social ‘’animals’’ so we, in our own way (introverts unite! 🙋🏽), want to form and maintain connections. This desire grows deeper the more depth (time) a relationship has. As I discuss in my eBook, evaluating these relationships is important. Especially the ones that have a very widely socially accepted caveat, the blood connection.
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When things aren’t going exactly peachy within the family and one feels it is best to cut contact with a or many members of the family it’s often brought up that family never turns their back on each other no matter what happens. This of course has lots of nuances that I will let you fill in for yourself. The point I am trying to make is that the socially accepted concept of never turning your back on family is a version of the sunk cost fallacy entangled with loss aversion.
Here’s why: even when knowing someone is not good for you and is doing you more harm than good you still will not break the tie and decide to cut your losses. You keep pouring into the relationship while walking away, however painful, would be better in time. This all because of the belief of never turning your back on family.
Before we continue I just want to point out that there are many more ways in which the sunk cost fallacy can and does affect your life. The ones I singled out here are ones that people should be hyper aware of as the impacts can be huge even though of others that I have not mentioned, such as investing money in several endeavors, the same can be said.
All in all the conclusion of how the sunk cost fallacy affects your life is that the risk of falling prey to the effect is there more often than you think.
Can The Mindset Hype Save You From The Concorde Effect?
First let me explain what I mean by mindset hype. I mean that for a lot of problems the solution offered is to just have or build a strong mindset and then the rest will fall into place because of it. Sorry to burst your beautiful rose colored balloon but that’s not how it works. Having strong convictions will not save you from having fallacies.
Now could it help you not fall trap as much? Potentially but that truly depends on the way you consider the aspects between which you are choosing. Concepts such as framing effect is still one that exists. Also other cognitive biases are also still a thing. I’d name a few but having to explain each one of them will take us away from the point. To be completely honest with you; No, having a strong mindset cannot help you avoid the sunk cost fallacy.
In fact it could actually help you be more affected by the fallacy as you could be too deep in a conviction to see other aspects that could prove extremely important in accurately weighing your options.
What can help you is the way your reference frame is set up, which by having read this post is now better equipped to handle it. What the mind knows it can be on the lookout for. Hence me bringing the sunk cost fallacy to your attention.
I will leave you with a question that will help you deepen your own relationship with the sunk cost effect.
What choices have you made that somewhere in the back of your mind you knew were not the choice you should’ve made?
Love,
DCPR.
*Don’t know this joke? You have to count everything that is in the equation, not just the numbers!
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