Welcome back to our series! We’ve already discovered why our calendars are always a mess (Planning Fallacy) and why we think everyone is watching us (Spotlight Effect). Today, we’re exploring a bias that keeps us stuck in bad situations, from boring movies to failing business ventures: the Sunk Cost Fallacy.
Have you ever sat through a terrible movie just because you paid for the ticket? Or continued to pour money into a car that keeps breaking down because you’ve already spent so much on repairs? This is your brain falling into a classic trap: the idea that because you’ve already invested, you must keep going.
What Exactly Is the Sunk Cost Fallacy?
The Sunk Cost Fallacy is the tendency to continue an endeavor once an investment in money, effort, or time has been made, even if the current costs outweigh the future benefits.
The term “sunk cost” refers to any cost that has already been paid and cannot be recovered. Rationally, since that money or time is gone forever, it should have zero influence on your decision about what to do next. However, emotionally, we feel like quitting would mean “wasting” that initial investment.
The Concorde Fallacy: A Sky-High Mistake
In the business world, this is often called the “Concorde Effect.” The British and French governments continued to fund the development of the Concorde supersonic jet long after it was clear that the project was no longer economically viable.
Because they had already invested billions, they felt they couldn’t stop. They essentially “threw good money after bad,” resulting in even greater losses.
Why We Can’t Let Go
There are a few psychological reasons why our brains refuse to cut our losses:
- Loss Aversion: As we’ve discussed before, losing feels twice as painful as gaining feels good. Admitting a project is over feels like “losing” everything you put into it.
- Waste Aversion: We are taught from a young age “not to waste.” Our brains misinterpret quitting as wasting, even if staying actually wastes more of our future resources.
- Public Image: Admitting a mistake can feel embarrassing. We stay the course to “save face,” hoping that things will somehow turn around.
Real-World Examples
- Relationships: Staying in an unhappy relationship because “we’ve been together for five years,” ignoring the fact that the next five years could be happy ones with someone else.
- Education: Finishing a degree in a field you now hate because you’ve already completed three years of study.
- Dining: Forcing yourself to finish a massive, mediocre meal because “I paid $30 for this,” even though eating it makes you feel sick.
- Gaming: Spending more money on “micro-transactions” in a video game because you’ve already spent hundreds of hours building your character.
How to Cut Your Losses Like a Pro
To beat this bias, you have to shift your focus from the past to the future:
- Forget the Past: Ask yourself: “If I walked into this situation today with a clean slate and no prior investment, would I choose to start this?” If the answer is no, it’s time to walk away.
- Focus on Opportunity Cost: Every minute or dollar you spend on a failing project is a minute or dollar you cannot spend on something better. Ask: “What else could I be doing with these resources?”
- Redefine “Waste”: Realize that the investment is already gone. Staying in a bad situation doesn’t “save” the investment; it just adds a new waste of time and energy on top of the old one.
- Seek an Independent Audit: Ask a friend who isn’t emotionally invested. They will see the situation much more clearly than you can.
The Takeaway
Quitting is not always a sign of failure; often, it is a sign of high intelligence. By recognizing sunk costs for what they are—unrecoverable history—you free yourself to make the best possible decisions for your future.
