As humans, most of us would like to believe that we are capable of making sound, rational decisions even during times of stress or uncertainty. In reality, research shows that many of our decisions are tainted by past emotional investments, leading us to employ flawed logic when trying to make important decisions. One bias, in particular, referred to as – sunk cost fallacy – is particularly problematic, often causing us to make decisions that are not in our best interest.
Sunk costs refer to past investments of time, money, or energy that have already occurred and; therefore, cannot be recovered. Since it is impossible to get back time and money, sunk costs should have no bearing on our current or future decisions. However, scientists have found the opposite to be true. We are actually wired to believe that past investments of time or money should be factored into our current decision-making.
Psychologists describe this phenomenon as “throwing good money after bad” arguing that this type of thinking is irrational. In fact, honoring this type of flawed logic can have a crippling effect on our ability to think logically, act rationally and can even lead to adverse psychological symptoms.
Unfortunately, it is easy to fall prey to sunk-cost biases.
Common Examples of Sunk Cost Fallacies
The All-You-Can-Eat Buffet
The Situation – You are on vacation in Las Vegas and decide to hit up the hotel’s notoriously famous all-you-can-eat buffet.
The Fallacy – “I need to eat as much as possible to make sure I get my money’s worth.”
The Outcome – You end up consuming way more calories than you normally would have if you just ordered off the menu. You feel uncomfortably full and frustrated with yourself for blowing your diet.
The Truth – The belief that you should consume something simply because you have spent money on it is a common example of the sunk cost fallacy. This irrational logic often leads us to finish meals when we are already full or believe we should finish everything that is on our plate. In reality, the money spent on the food is a sunk cost that you cannot get back. Researchers have found that we are particularly vulnerable to this flawed logic if we are asked to pay for something up front. A study conducted by Siniver, Mealem, and Yaniv (2013) found that people who were forced to pay prior to getting access to an all-you-can-eat buffet ate significantly more than those who were required to pay after the meal. This empirical study demonstrates the power of the sunk-cost fallacy.
The Advanced Degree Program
The Situation – You are enrolled in law school and have just completed your first year. Thus far, the program has not been what you anticipated and although you are performing well, your heart is not into it. You have begun questioning whether this is the right career path for you.
The Fallacy – “I have already wasted a year of my life in the program…I might as well finish it.”
The Outcome – You decide to stay put and end up spending two more years feeling miserable while racking up even more student loan debt. Even worse, you still have no interest or desire to pursue a job in the industry post-graduation.
The Truth – The belief that you have already wasted valuable time and effort is keeping you stuck in a program that makes you unhappy. In reality, the time, money, and effort spent on the program during the first year is already a sunk cost that you cannot get back. Cutting your losses after the first year would have prevented you from accumulating two more years of debt and would have likely improved your mental well-being.
The Bad Relationship
The Situation – You have been friends with a particular person for a very long time. The relationship was great in the beginning. You had fun together and were each other’s support system. However, over the past year or so, the relationship has started to change. Your values have changed and you find that you no longer enjoy your time together.
The Fallacy – “We have been friends for so long and I have already invested so much time and energy into the relationship…I might as well stick it out.”
The Outcome – Despite recognizing that the relationship is no longer working for you, you continue spending time with this person. As a result, you end up creating more opportunities for frustration and disappointment. You find yourself feeling resentful of how much time the relationship is taking you away from other things you would like to pursue.
The Truth – It is a hard pill to swallow when we realize that we have invested so much time and energy into something that is no longer fulfilling. In reality, relationships sometimes outlive their purpose and that’s okay. The friendship once served an important role in your life; however, people change and it is okay to move on. Try ending the relationship on friendly terms. An amicable split will leave you feeling pleasant and settled, freeing up your time to pursue more satisfying friendships.
The Dead-End Job
The Situation – You have been working at the same job for many years and you are feeling stressed and burned out. You have been unhappy for a very long time. In fact, every Sunday evening you notice yourself feeling depressed at the very thought of having to go back to work the next day.
The Fallacy – “I’ve been at my job for 10 years already, I can’t leave now.”
The Outcome – You end up staying put in a job that brings you no satisfaction. You ruminate over your past decisions to enter that career in the first place, which leaves you feeling even more depressed. You convince yourself that this job is all you know and that nobody will ever hire you to do something else. It’s a lost cause to think about leaving.
The Truth – This scenario is all too common. Sunk cost fallacies are often at play when we convince ourselves that it’s best to stay put in a job we are unhappy with. We believe that the time we have put into the job should be worth something. In reality, that time is already a sunk cost that you won’t get it back. Why spend another 10 years in a job that shows no signs of improving?
Why We Fall Victim to This Type of Thinking
- We are an innately loss averse species. Research has shown that humans prefer to avoid losses over acquiring equivalent gains. Consider the following scenario…a friend offers to flip a coin and tells you that she will pay you $20 if it lands on heads but if it lands on tails, then you will have to pay her $20. Would you take that gamble? Psychologists Amos Tversky and Daniel Kahneman claim that we would be less likely to take that bet unless the amount we could possibly win is at least twice as large as the amount we could lose. Otherwise, we tell ourselves that it’s not worth the risk.
- We convince ourselves that the future might be different. We have a tendency to believe bad circumstances have a chance of improving even when there is no evidence to support that belief. If you’ve lost at the roulette wheel 10 times in a row, there is no reason to believe that the next spin will be favorable. The odds are the exact same as they were for the previous 10 spins.
- We do not want to admit failure. We often feel that if we choose to abandon an original investment – whether it’s time, money, or energy – we are admitting that investment was a big waste of resources. It is difficult for any of us to admit failure and so we typically try to avoid it at all costs.
- Cognitive dissonance leads us to justify our decisions. According to cognitive dissonance theory, people who feel responsible for prior losses will attempt to rationalize their mistakes, either by biasing information related to their choices or by sticking with them. Psychologists have found that people will rationalize past actions even when faced with evidence that contradicts their prior choices. This often leads them to invest further resources into a particular course of action, even when there is a high likelihood that their decision will produce a negative outcome.
It is important to remember that there are times when it is worth sticking out a current investment. After all, values such as determination and perseverance are what gives us the grit we need to work through obstacles. However, choosing to continue down a path that isn’t working for no other reason besides the fact that we have already walked a long way is irrational and not worthwhile. In this type of scenario, we are allowing our decisions from the past to determine our future decisions, even when these future decisions will negatively impact our happiness and future success. It is important to keep that distinction in mind.
How to Avoid the Sunk Cost Trap
Meditation is a proven technique that can help navigate rational decision-making. Through meditation, you learn how to stay focused in the present moment, which helps you learn to avoid making emotional and impulsive decisions. Once you are focused, you can begin to clarify what it is you are trying to achieve. Identify objectives that are needed to help you achieve your goals. Generate alternative options when needed. Mindfulness training also helps you to make decisions that are aligned with your underlying values.
Create a Future Vision
We often focus on the past when trying to make decisions about our future. That is the crux of the sunk cost fallacy. Try to avoid focusing on past choices and investments especially if you are trying to determine future results. Think about what you want to achieve in the future and set realistic goals. If the future looks more promising without your current job or relationships, then it may be time to cut your losses and let it go. Remember, when you are thinking about whether to continue with a project, relationship, or job, you tend to feel the pain of loss more keenly than the pleasure of success, which can distort your decisions. Use self-awareness to help you stay engaged in rational decision-making.
Force Field Analysis
Complete a force field analysis to weigh the pros and cons of your decision. Begin by defining your goal or vision for the future. Next, think about all of the internal and external forces that are driving the needed change. Then begin to brainstorm the forces that are resistant or unfavorable to change. Assign each force a score from one (weak) to five (strong) and add up the scores for each side (for and against). This technique will assist you in deciding whether or not to move forward with a major decision.
Include multiple people in the decision-making process. Find people who will challenge you to examine any flawed logic that is present in your thinking. It is helpful to seek out others’ opinions who were not part of the initial decision you made to invest in a job or relationship. This will help you gain perspective on your choices and decisions.
Lewin, K. (1946). Force field analysis. The 1973 Annual Handbook for Group Facilitators, 111-13.
Siniver, E., Mealem, Y., & Yaniv, G. (2013). Overeating in all-you-can-eat buffet: paying before versus paying after. Applied Economics, 45(35), 4940-4948.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131.