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Understanding Sunk Cost Fallacy

Sunk costs are part of life. We often find ourselves upset about wasted time, especially when the result of something that requires time, effort, and money is incommensurate. Sunk costs are incurred in the past and cannot be recovered.

Imagine you are reading a book. You are 100 pages in and you realize that you despise the book. It’s boring, uneventful, poorly written, and overall a waste of your time. The first 100 pages that you read – the effort, time, energy, and the opportunity cost of other things you could have been doing instead of reading those 100 pages – are sunk costs. They have already been incurred and you cannot recover them. You cannot go back in time and choose not to read those pages.

Now, you might say to yourself “I’ve already read these 100 pages, so I might as well finish the whole book.” Is this a legitimate reason to continue the book? Perhaps it is if you have been made aware that the book, in fact, gets a lot better later on. Your continued dedication to finishing the book all depends on whether you have the patience to defer putting it down until it starts to pick up. The question still remains, however, whether or not the initial investment of 100 pages justifies continued reading.

For a more fatuous example, I was getting ready for a formal event one morning. I did my hair quite well, shaped my beard, ironed my shirt, picked out a great tie, prepared my suit, and polished my shoes. I spent a considerable amount of time getting ready. To my disappointment, however, the event was canceled last minute due to inclement weather. I was all dressed up with nowhere to go. I reasoned that I should wear the suit for the rest of the day. I spent all this effort getting ready, I might as well get the value of my outfit, right? I proceeded to watch Netflix in a bespoke suit.

This seems pretty insane, but this kind of reasoning pervades everything from financial investments to romantic relationships. It’s called the Sunk Cost fallacy and it’s a huge no-no in decision making. Any costs that you have incurred, which cannot be recovered, should have no bearing on future decisions. It’s almost axiomatic why this sort of thinking is a fallacy, but nonetheless, it requires explaining.   

It doesn’t make sense to continue incurring costs and depleting resources because costs have already been incurred. It’s an emotional decision, not a rational one. Sure, you can be mad at yourself for making mistakes. However, it is important to learn from them. Going forward, do yourself no favours by trying to rectify your mistakes with further investment. This fallacy reveals a lesson about personal development.

Why change now?We've already wasted so much money.

You have to view your life in its present moment – you cannot afford to be burdened by your past. That’s not to say live transiently and to make uninformed decisions about your future. It is to say, however, that we often think we are making informed decisions when we consider past mistakes, but in reality, we are ensuring punishment for our past in our future. We do not deserve that. We deserve to make clear decisions for a better future. We deserve to learn from our mistakes and let them go. Remain accountable, but don’t punish yourself.

In a more heartbreaking example, if one realizes after four years in a relationship that their partner is making them unhappy, they might be inclined to stick it out because all this time was invested into it. You might think of the costs associated with having to spend four more years getting to know someone else as intimately as you know your current partner. It might make sense to stick it out because you’ve already spent these four years of your life with this person. Despite them making you unhappy in the present, those four years you invested are gone.

You may have spent all this money on dates, vacations, maybe even a ring, but those costs have already been incurred and you cannot recoup them. You don’t somehow reclaim the value of all things lost by putting up with a miserable relationship – that actually sounds like a punishment.

So next time you spend tons of money on a project that isn’t panning out the way you hoped, or you read 100 pages of a book that you despise, or you end up in a relationship that isn’t worth your time and energy, think about the sunk cost fallacy before you make a decision about your future.

You will thank yourself.

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