How to Overcome the “Sunk Cost Fallacy” Mindset
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Do you often find yourself continuing on a path that doesn't feel right, only because you’ve already invested so much time or money into it?
You might strongly dislike what you’re doing, but you feel like you have to stay the course because you can’t imagine doing anything differently.
If this sounds familiar, then you’re probably dealing with the negative consequences of the “sunk cost fallacy” mindset.
In this article, we’ll talk about the dangers of this mindset, and why it is important to avoid it. I’ll give you five examples of the sunk cost fallacy, and then I’ll detail a step-by-step action plan for overcoming this mindset.
Let’s get to it!
(Side note: One way to improve your life is to read and learn something new every day. A great tool to do this is to join over 1 million others and start your day with the latest news from Wall St. to Silicon Valley. This newsletter is a 5-minute read that's informative, witty and FREE!)
What You Will Learn
- What Is the Sunk Cost Fallacy?
- Five Examples of Sunk Cost Fallacy
- How to Make Better Decisions and Avoid Sunk Cost Fallacy
- 1. Develop and remember your big picture.
- 2. Develop creative tension.
- 3. Keep track of your investments, be it time or money, and be ready to cut your losses when the numbers don’t look good.
- 4. Get the facts, not the hearsay.
- 5. Let go of personal attachments.
- 6. Practice mindfulness.
- 7. Allow yourself to make mistakes and admit them.
- The True Cost of Sunk Cost Fallacy
What Is the Sunk Cost Fallacy?
In business and economics, a “sunk cost” refers to any cost that has been paid and cannot be recovered. For example, a company may have spent a hundred thousand dollars to upgrade its computer system.
The money that was spent cannot be recovered, so it shouldn’t be a factor in the business’s future decisions if two years later it is best to spend more money on an entirely new system.
Sunk cost fallacy could also happen in your personal life. Say you bought tickets to see a band play in your town, but you wake up sick on the day of the concert. Even though you don't feel well, you may decide to go to the concert anyway to avoid thinking that you wasted your money.
If you do this, you have fallen for the sunk cost fallacy. While you did spend the money already, you can't get it back whether you go to the concert or not.
If you are going to be miserable at the concert because you are sick, you're not going to get anything out of the money you spent anyway. In this case, it would be best to skip the concert, even though you paid for it.
Sunk cost fallacy psychology is based on the idea that people have stronger emotional connections to things they've lost (including time) than they do to the things they've gained.
It also says that the psychological drive to recover things that you lose is a strong motivator that can cause you to make bad decisions.
Sunk cost fallacy occurs when you make decisions that are based on the emotional investments that you have already made. The more time or money you invest in something, the harder it is to let it go.
No one likes the feeling of losing something or facing a possible mistake that they have made, but sometimes it is the best thing to do in the long run.
Five Examples of Sunk Cost Fallacy
Sunk cost fallacies sing to the tune of “I might as well…“
Here are some specific examples of this mindset that you may be able to relate to.
1. Getting a useless degree
“I might as well keep attending this useless class that I already paid for.”
You're coming up on your final year of business school, and you realize that you really don't want to have a career in business because your passions lie elsewhere. But you keep attending your classes to finish up the degree because you’ve already invested time and money into the process.
The important thing to remember here is that the time and money that you have already spent is gone and cannot be recovered. But whether you spend even more time and money on the degree is still in your control. What you have already relinquished doesn't matter if you never plan on using the degree.
2. Eating bad food or eating too much
“I might as well keep eating this junk food because I already bought it.
You decide it is time to lose weight. You have a lot of unhealthy food in your house that will not help you make progress toward your goal, but instead of trashing it or giving it away, you tell yourself that you still have to eat it because you spent money on it. Or, when you’re eating out, you finish eating everything on your plate, regardless of the fact that you feel full because you already paid for it.
The money is gone whether you eat the food or not. If your future goal is to lose weight, it is better to work towards that rather than trying to recoup your perceived losses.
To learn more about nutrition, here are 192 healthy habits to help you become your best self.
3. Standing by bad decisions
“I might as well finish reading this bad book because I already bought it” or “I might as well keep watching this bad movie because I already bought the ticket.”
Sure, your money is gone—but all of your time doesn't have to be. Whether it’s a book or a movie, don't allow the money you spent on it to bind you to it. This will not only waste more of your time, but it will also waste your brainpower. Instead, think of the money spent as being worthwhile because at least now you know that the book or movie wasn't for you, and you don't have to wonder anymore.
4. Continuing toxic relationships
“I might as well stay in this toxic relationship because I’ve already invested so much time and emotion in this person.”
This can be a slippery slope. Staying in a bad romantic relationship simply because you've spent so much time with this person and you can't really see yourself dating someone new is a dangerous mindset. The more time you spend in a relationship with a sunk cost fallacy mindset, the more difficult it will become to leave.
Relationships with toxic people can drag you down like, “crabs in a bucket”
Check out some of the important posts below that will educate you about dealing with these toxic folks.
5. Sticking with a bad business idea
“I might as well keep pouring more money into this venture because I already invested a lot.”
Sunk cost fallacy is also known as the Concorde Fallacy for this very reason. Throughout the Concorde project, in which a team was building a supersonic airliner, no one wanted to give up, despite the unstable finances.
This project has now been termed the “Anglo/French financial misadventure” because the French and British governments continued funding the airliner even after it was obvious that there was not an economic case for it.
When the financial growth of a business is uncertain going forward, the decision to keep going shouldn't be based on the time and money already spent.
In your business or personal life, this could sound something like, “I already have too much invested” or “We need to just work a bit work harder.”
If something is not working, you have to know when it is time to throw in the towel. Sunk cost fallacy economics may suggest otherwise, but you must look at the facts.
How to Make Better Decisions and Avoid Sunk Cost Fallacy
So how do you know if you have a fighting chance or a chance to fight? The fact is, because we are wired to stay consistent in our lives, we can’t entirely remove this urge.
But there are a number of ways we can reduce the frequency of making decisions based on sunk cost.
Here are seven methods you can use to make better decisions and avoid falling into the sunk cost fallacy trap.
1. Develop and remember your big picture.
The first step is to define your vision and make your decisions based solely on that. Put your vision into a detailed format, and put it somewhere you can reference it often. For example, you can keep a copy of the vows you said at your wedding in your wallet, or you could put a picture of your goal physique on your refrigerator.
Doing these things will help you act with more clarity so you can make decisions that are based on your vision rather than your sunk cost. It will also encourage you to give more thought to your decisions, which is important when it comes to things like getting married or beginning a start-up company. You want to avoid making decisions that are based only on the present moment without looking at what is best for your future.
2. Develop creative tension.
You develop creative tension when you are able to describe your vision and your current reality, but there is a clear gap between the two. This gap leads to an energetic and motivational tension that must be resolved.
Think about stretching a rubber band. The more you stretch it, the more tension it creates. The rubber band continues to get tighter and tries to pull back to resolve this tension. Now, imagine that your right hand is your vision, your left hand is your current reality, and you are pulling a rubber band in opposite directions with both hands.
The larger the gap is between your hands (representing your vision and your reality), the more tension the rubber band will create, and the stronger your motivation will be to reduce the tension.
Like your hands in this metaphor, you need to engage both sides of your brain, or have “opposing” advisers as a means of checks and balances to develop creative tension. To learn more, here is an article that details 26 money habits you can build.
3. Keep track of your investments, be it time or money, and be ready to cut your losses when the numbers don’t look good.
Sometimes you aren't sure if you should throw in the towel or not. As time goes on, it starts to become obvious that things aren't going as planned, but instead of moving on, you stay wrapped up in what you have already lost. But when it comes to cutting your losses, it is important to think about what you have to gain instead of what you have to lose.
When we consider our visions to be potential gains, we automatically become comfortable with accepting our mistakes and the losses we have incurred during the process. But what if we start to consider our goals in terms of what could possibly be lost if we don't succeed?
When you keep track of your investments and your future opportunity costs, your chances of recognizing a doomed endeavor increase, and it is easier to cut your losses and try to make the most of an unfortunate situation.
It's not hard to let go if you make an honest effort to refocus when you are making decisions. Pause for a minute and consider what you could gain by cutting your losses now. Doing this will make it easier to make the right decision.
If the future looks brighter without the project at hand, then cut your losses and let it go.
4. Get the facts, not the hearsay.
Have you ever felt like your vision is worth more than the money you have to pay for it? Maybe you realize you have spent a lot of money, but believe that one day it will all pay off. If this is keeping you hanging onto what may be a lost cause, make sure you stick to the facts.
You may try to convince yourself that your dream will become a reality, but as you are doing that, make sure to analyze the things that you are absolutely certain of instead of only the things that you are hoping will happen.
It is also important to not give in to external forces. Other people may be urging you to continue what you are doing, or you may even be pushing yourself too hard because you don't want to disappoint other people. Ignore this type of hearsay.
5. Let go of personal attachments.
Often, in an effort to avoid change and shame, we stick with our original decisions even if we know they likely won't succeed. Letting go of anything that has taken up so much of your money and time is a difficult thing to do, especially if you have developed a large emotional attachment.
It is important to learn how to let go.
Let go of your fear of waste and failure. Remember that everything in this world grows and changes, and not all projects succeed. By doing this, you will be able to ease your grip on something that you know in your heart is doomed.
6. Practice mindfulness.
Practicing mindfulness can influence sunk cost bias.
When you are able to focus your attention on your breathing and living in the present moment, you will focus less on what has happened in the past and what will happen in the future.
This will help you detach from the past and feel fewer negative emotions about any losses you have incurred, and resist the sunk cost fallacy mindset.
Recognize new information that comes up that suggests a change needs to be made from the status quo, and learn how to ask yourself better questions. This will help you see that some sensible decisions that seem wasteful or painful in the moment are often the best decisions to make for the long term.
For example, you may ask yourself, “Am I doing this based on fear and to avoid any possible pain?” or “What emotional state am I in when I am making up my mind?” or “Is my decision going to align with my vision?”
Practicing mindfulness will make you less likely to make decisions based on your emotions, and it will help you focus on the things that truly matter.
Meditation is an effective way to train your mind. It helps you focus on the current moment and guide your attention in the best direction.
7. Allow yourself to make mistakes and admit them.
Learn to be able to acknowledge a loss and move on. Yes, it may be difficult to admit when you are wrong. But having the ability to accept your mistakes and learn from them is an important part of making better decisions in the future.
If you want to be able to grow, you have to be honest with yourself, even if the truth hurts. You can't control the past, so it doesn't make sense to ruminate on your mistakes. Learn from your mishaps and keep going.
It may be difficult to allow yourself to make mistakes. To make this easier, think about the worst-case scenario that you have created. You will likely see that it isn't really that bad, and you will be willing to face it.
The True Cost of Sunk Cost Fallacy
The sunk cost fallacy mindset doesn’t just lead to poor decisions—it can also impact your life on a larger scale. The bigger the decision, the easier it is to fall prey to the sunk cost fallacy mindset.
Once you recognize that you won't succeed, it shouldn't matter how much time or money you have already put into whatever you are doing. If a project at work or a relationship in your personal life has already taken up a lot of your valuable time, it makes no sense to allow them to use up the time you have ahead of you. But if you only think about what you will lose if you move on (instead of the cost of not moving on), you will wind up losing a lot more in the end.
The sunk cost fallacy mindset can happen whenever you feel like the only reason you’re continuing with something is that you’ve already spent time and money on it. If you can relate to this, start with the seven-step action plan and see if you are able to gain more clarity.
The truth is that no one is perfect. Human behavior has been hardwired for hundreds of thousands of years. But considering your sunk costs will help you gain critical information for your decision-making process.
Try to make better and more informed decisions by exploring your options so you can minimize your tendency to base your choices on financial and emotional investments that cannot be recovered.
Finally, one way to improve your life is to read and learn something new every day. A great tool to do this is to join over 1 million others and start your day with the latest news from Wall St. to Silicon Valley. This newsletter is a 5-minute read that's informative, witty and FREE.