Sunk Cost Fallacy: When You Keep On Investing Time And Money

What Is The Sunk Cost Fallacy?

Also known as the Concorde fallacy, sunk cost fallacy is the idea that we are more likely to continue investing in something if we have already invested so much time or money. 

For example, you spend $100 on a concert ticket to see your favorite band. The day of the concert came, and it was terrible. The band is out of tune, the sound is terrible, and you’re generally unimpressed. Because you’ve already spent $100 on the ticket, you feel like you have to stay until the end. After all, you can’t just waste that money, right? Wrong.

Most people fall into the sunk cost fallacy because it doesn’t consider opportunity cost, the cost of foregone opportunities. In our example, the opportunity cost of staying at the concert is the two hours of your life that you’ll never get back. And that’s not even considering that you could have spent that $100 on something else that would have made you happier. 

Common Sunk Cost Fallacy Examples

Here are three of the most common sunk cost fallacy examples. 

• The British and French governments continue to pour money into a project that is not working simply because they have invested so much already.
• Despite losing, we keep playing this game because we have already invested so much time and money.
• I don’t want to quit my job, even though I’m miserable, because I’ve already invested so many years in it.

Why Does This Matter To College Students?

The sunk cost fallacy is especially relevant to college students because they often find themselves in majors they hate. They think, “I’ve already taken all these classes/spent all this money. I’ve already invested time; I can’t just quit now.” 

But they fail to realize that by staying in a major they hate, they’re sacrificing our mental health and well-being—and that’s not worth it, no matter how much money or time they’ve already invested.

Why We Keep Falling For It

There are several reasons why the sunk cost fallacy is such a strong bias. For one thing, humans are loss-averse creatures. We hate feeling like we’ve wasted our time, money, or effort, even if that means continuing to suffer in the present.

Additionally, the sunk cost fallacy plays into our need for consistency and commitment. Once we’ve made a decision, we want to stick with it (even if that decision maker was wrong initially). This need for consistency can lead us down some pretty dark paths, like staying in an abusive relationship because we’re “committed” to our partner. 

How To Overcome The Sunk Cost Fallacy

You may wonder how you can overcome the sunk cost effect. After all, if humans are hardwired to make these irrational decisions, what hope do we have? 

Fortunately, there are a few things you can do to protect yourself from falling prey to the sunk cost fallacy. First, try to be aware of your own biases and tendencies. If you know that you’re prone to fall victim to this bias, you can catch yourself before making an irrational decision. 

Second, consider the future course of action, including costs and benefits rather than past ones. It can be helpful to think about whether or not something is still worth your time and money rather than dwelling on how much you’ve already invested in it. 

Finally, seek out the advice of others when making important decisions. Other people can help provide some much-needed perspective and help keep your biases in check. 

Psychological Effects Of Sunk Cost Fallacy 

Here are some psychological factors that people experience their costs are sunk. 

Loss Aversion

Loss aversion is a common psychological phenomenon that can lead to suboptimal decision-making. Simply put, we feel the pain of a loss more acutely than the pleasure of a gain. This often leads us to make rational decisions designed to avoid losses, even when the expected outcome is not positive. 

In many cases, this can lead us to miss out on potential gains or even end up worse off than we would have been otherwise. However, understanding loss aversion can help us to make better decisions and avoid these pitfalls. By being aware of our loss aversion, we can account for it in our decision-making process and make choices that are in our best interest.

Commitment Bias

Commitment bias is the tendency to stick with our original decisions, even when we know they may be wrong. This can lead us to continue investing time and money into something – even when it’s a bad investment – simply because we don’t want to admit that we made a mistake.

For example, imagine you’re considering investing in a new company. You do your research and decide that the company has good potential. You invest $1,000, but the company’s stock takes a nosedive. If you suffer from commitment bias, you may hold on to your shares, telling yourself that the stock will eventually rebound. 

Waste Avoidance

Waste avoidance is the aversion to wasting something – whether it’s time, money, or effort. This can lead us to continue investing in something even when it’s a bad investment because we don’t want to feel like we’ve wasted what we’ve already put into it.

In other words, we’d rather keep throwing good money after bad than admit that we made a mistake and cut our losses. Of course, this isn’t always the best strategy. Sometimes, it’s best to admit that something is a lost cause and move on. 

Personal Decision-Making

Personal decision-making is the tendency to make decisions based on our circumstances and preferences. This can lead us to make suboptimal decisions because we may not consider all relevant factors.

In these cases, it’s important to take a step back and consider all relevant factors before deciding. Otherwise, we may end up making suboptimal choices that we later regret. So next time you face a big decision, take your time and think it through.

How To Avoid Sunk Cost Fallacy

Here are some steps that can help a victim to avoid sunk costs. 

Framing The Problem Correctly

It’s easy to get bogged down in the details of a problem. We think about all the time and energy we’ve already invested, and it can be tough to let go. But it’s important to take a step back and look at the big picture to find the best solution. That means framing the problem correctly.

Instead of thinking about all the time and energy we’ve already invested in something, we need to focus on the future. What are the costs and benefits of continuing down this path?

Remaining Independent. 

Oftentimes, the people closest to us are more concerned with their interests than ours. They may try to steer us in a certain direction because it’s convenient for them or because they don’t want to see us succeed. 

You need to be strong and stand up for yourself. You must follow your path, even if it means going against the grain. You can stay true to yourself and achieve your goals by remaining independent.

Trusting The Data. 

If the numbers tell us it’s time to move on, we must be willing to do so. Emotional attachments can cloud our judgment. The best way to avoid the sunk cost fallacy is to make decisions based on logic and data, not emotion. 

If the numbers tell us it’s time to move on, we must be willing to do so. It may be hard, but it’s always better to trust the data in the long run.

Changing The Risk Preference. 

Sometimes, taking a risk is the best way to avoid sunk cost fallacy. If we’re unwilling to let go of something that’s no longer working, we’ll never be able to move on and find something better. 

Of course, there’s a fine line between taking risks and being reckless. You need to be strategic about the risks you take and be willing to accept the possibility of failure. 

We’ve all fallen victim to the Sunk cost fallacy at one point or another. We convince ourselves to continue investing in something, whether a concert ticket or a relationship. We don’t want to admit defeat or accept that we wasted our time, money, or energy. 

But by continuing to invest in something that isn’t worth it, we are only digging ourselves deeper into a hole. The next time you find yourself in a situation like this, ask yourself if it’s worth it before making any decisions.