In Psychology the Sunk-cost Fallacy is a type of cognitive bias in which people continue to pursue an endeavour, due to the fact that they have already invested heavily into it, regardless of if it is a good decision or not.
The Sunk-cost Fallacy often leads to individuals making irrational decisions because they factor in their previous investments, e.g. time and effort, when deciding on a rational outcome. The issue with this approach is that the investment is in the past and impossible to recover, hence it should not be used to justify current decisions.
Why does the Sunk-cost Fallacy occur?
The reason that the Sunk-cost Fallacy is so prevalent in our lives is because humans often allow emotions to influence decisions, leading to irrational outcomes. A potential reason for why the Sunk-cost fallacy occurs is because of the human desire for consistency. If we have previously made a choice, it is likely that we will follow through with the choice even if it is clearly incorrect, in order to facilitate our need to appear consistent to ourselves and also others around us.
Another explanation for the Sunk-cost Fallacy is loss aversion, which refers to the concept that the impact of a loss feels much worse than the impact of a win. As a result, it is common that individuals will aim to avoid a loss, rather than seeking out a win. The larger the investment into a choice, then the greater the loss will be, as more time and effort will be wasted. Due to loss aversion people often choose to carry on endeavours that they know are harmful in the long-term, simply because they want to avoid the feeling of a loss.
Examples of the Sunk-cost Fallacy?
The Sunk-cost Fallacy can be seen in a variety of real-world examples. Firstly, it can be seen when making career choices. A large portion of people find themselves in a job or career pathway, e.g. higher education, that they no longer enjoy. However, they continue to pursue the pathway that they have previously chosen due to the time and effort that they have already invested into it. Consequently, people continue to live a life that they are not fully satisfied with. In addition, the longer someone stays in a job/career that they do not enjoy, the more investment is made, which makes it even more difficult to change.
Another good example of the Sunk-cost Fallacy can be seen in relationships. People often use previous investment as a justification for remaining in a relationship which is not satisfactory. People might remain in an unhappy relationship that yields no benefits, because the psychological loss of leaving the relationship outweighs the struggles of the relationship.
The Sunk-cost Fallacy is also highly applicable to the field of investing, e.g. stock market or properties. For example, an investor may continue placing money into a failing stock because they have already invested heavily into it and wish for it to succeed. Subsequently, the investor will continue to pour their money into an unprofitable investment, leading to an even larger loss. The rational decision would be to accept the loss and reallocate resources, e.g. money and research, into a different investment opportunity.
A final example of the Sunk-cost Fallacy can be seen in political decisions. Governments may continue to fund projects which are ineffective just because they have invested heavily into it, and wish for it to succeed. For example, the government may initiate a new megaproject such as a railway expansion. However, the costs of resources may increase as the project is being built, leading to expenses outside of the government budget. Regardless, the government may continue to invest into the project due to large amounts of previous investment.
How to Overcome the Sunk-cost Fallacy?
It is very difficult to overcome cognitive biases such as the Sunk-cost Fallacy. On the other hand, being aware of the Sunk-cost Fallacy is one of the best ways to challenge poor decisions, based on irrational justification, e.g. previous investment. Awareness can be used to restructure the mind to base decisions on current and future costs, rather than making choices based on the past.
A potential way to reduce the effects of the Sunk-cost Fallacy is to use objective and reliable data as a justification for decisions. This will reduce reliance on emotional decision-making, and should result in more rational decisions. For example, an investor should aim to look at objective data regarding their investments, rather than continuing to invest just because they wish for their investment to succeed.
Another way to avoid falling into the Sunk-cost Fallacy trap is a sort of cognitive restructuring. Individuals should avoid viewing a shift in decisions as a loss/quitting, rather it should be viewed as a strategic redirection which will ensure a positive trajectory. This view of decision-making will reduce the chances of remaining in a venture which provides limited progression, as the psychological feeling of loss is not as powerful.
Is the Sunk-cost Fallacy always Bad?
After reading the majority of this post, you may be under the impression that the Sunk-cost Fallacy always lead to detrimental outcomes. However, this may not be entirely true as the Sunk-cost Fallacy can be applied to force good outcomes. For example, imagine you spent a large amount of time/effort to discover a new diet plan. You are more likely to follow through with the diet plan if you have invested heavily into it. Hence, the Sunk-cost Fallacy can be reframed in a way which has positive implications also.
Conclusion of the Sunk-cost Fallacy
The Sunk-cost Fallacy is a powerful cognitive bias, which the majority of people are completely oblivious to. Considering that you have read this post you should now have a basic grasp of how the concept works, which should allow you to be more aware of your irrational decisions based on poor justifications. Rational decision-making should involve analysing the situation at the current point in time and selecting the pathway that offers the brightest future, even if it means admitting a previous mistake. Next time you find yourself in a situation which involves verifying a previous decision/investment, ask yourself if you are staying loyal to your past, or punishing your future?
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