What is the Sunk Cost Fallacy?
Sometimes our desire to complete an undertaking is big if we have already invested money, effort, time, and energy into it, regardless of whether the present costs exceed the benefits. We just want to see the project completed and the more we put into something, the more difficult it is to quit it. This is called the Sunk Cost Fallacy, and it might also result in substantial financial and psychological anguish. This conduct might be defined as “throwing money down the drain,” while refusing to surrender to “cutting one’s losses.”
The prospect of losses and gains.
With time, the potential of losses has proven to be a more strong incentive than the prospect of profits. You aim to prevent losses of any type whenever feasible, and you don’t value losses and gains equally. That frequently involves going against information that suggests it is no longer the greatest idea to continue putting effort into something. Quitting something while we are already emotionally committed to it may appear challenging in our minds. We are prone to follow through on a decision that we have invested in even if it is not in our best interest because we want to prevent unpleasant feelings of lost opportunity.
“It amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.” – Robert Shiller
We can apply examples of sunk cost fallacy in many things, the most common is investing money into something, for example buying a stock share hoping it will go up and give us benefits, despite what the market is saying. But, we can also use this in relationships, we often doubt when to quit a bad partner, just because we spend years of our lives with them and in the relationship. As we can see the sunk cost fallacy asserts that we make wrong calls because we take into account variables outside the available possibilities, mostly we only consider our feelings and emotions, rather than looking at the facts.
The Fear of losing.
Sometimes we care more about what we could lose, than what we could gain. As we can feel pain when we must give up anything we own, no matter the amount we lose, the sensation of losing is heavy. When offered a chance to accept or reject a gamble, most people refuse to make take a bet unless the possible payoff is around double the potential loss.
Loss aversion shows that a person has the inclination to choose to prevent losses above gaining rewards.
A probable cause for the sunk cost fallacy is loss aversion. This cognitive dissonance explains how, for some people, the emotional effect of losing is twice as great as that of winning. Feeling like a loser leaves a bad taste, and destroys our motivation to do other things, for fear we will fail again.
“I’m not emotional about investments. Investing is something where you have to be purely rational and not let emotion affect your decision making – just the facts.” – Bill Ackman
When considering the stock market, for instance, some people’s primary assumption is not how much they may earn, but rather they are concerned about purchasing a stock because they believe it to be risky and are considering how much they would lose. This may have a negative effect on our decisions and cause us to make poor choices. Even calculated risks that have the potential to provide significant rewards in investment, relationships, or our spending habits, can be avoided because of the fear of suffering losses.
Class structure.
The class structure appears to be a substantial predictor of a person’s level of risk avoidance, with economic and educational factors also playing a significant role in risk rejection. This suggests that since they are used to abundance, members of the rich class can afford to take risks more frequently. While a person from the middle or lower class cannot afford to lose money because their very existence depends on it. Typically, affluent and wealthy people place a higher value on profits than less influential people do.
Some Examples of the Sunk Cost Fallacy that are Prevalent in Daily Life.
When people improperly balance the marginal costs and benefits of a course of action, it can lead to irrational decisions, which is a situation that the Sunk costs fallacy aims to address. In reality, this fallacy occurs quite frequently in daily life. People will sometimes reinvest money and resources into a failed venture. Some people, for example, will purchase extra lottery tickets after winning a little sum. Or they’ll pour additional money into a failed company or endeavor. People are eager to add additional gasoline to the flames of their failure in both circumstances.
Bad investments.
Although many people use previous investments to justify future ones, these prospective investments hardly ever happen. While previous investments may have been reasonable while they were being pursued, big failures can cause someone to become defeated and morally rotten as a human. Our risk prevention mechanism is constantly on guard, ready to prevent you from sacrificing more than you can afford to, so you continually consider the benefits and costs.
When we can obtain anything extra, such as a bonus or a free gift, we are more likely to accept a deal. Good marketing and advertising strategies make use of this factor by convincing us that a product is worth far more than the price we must pay. Once we have made the purchase we feel happy, and we no longer experience the sting of losing money on a particular item.
“Nothing defines humans better than their willingness to do irrational things in the pursuit of phenomenally unlikely payoffs. This is the principle behind lotteries, dating, and religion.” – Scott Adams
We are afraid to admit we spent our money badly.
Sometimes when we buy a product or service, even if is bad, we tend to stick with it, just because we don’t want to feel we are wasting money. For example when we paid to go watch a movie, a concert, a party, or any event, and we aren’t really enjoying the experience, but we decide to stay because we already spend money on it.
We select the less logical alternative for a number of factors.
We believe that since we paid for it, it would be a loss not to go. We feel bad or dumb since we put so much money into it and received hardly anything in return. On some occasions, we keep deluding ourselves by believing that we could gain anything if we go. The same thing happens when we order too much food or eat something we didn’t like, but it feels like a waste to not eat it all.
This occurs because, after we have chosen a course of action, we are more likely to feel guilty or experience shame or regret if we do not carry it through, even if choosing this makes us feel miserable.
The Sunk Cost Fallacy in our relationships.
The sunk cost fallacy can also explain why some decide to stay in a toxic relationship. People are willing to continue putting effort into a failed relationship for prolonged periods of time the more the relationship has been running. People are far more likely to continue in toxic relationships when they have previously put money, time, and effort into those connections. They frequently use justifications such as “We have been involved for so long” or “We have committed so many years and we have put so much effort at it” to maintain the relationship.
They don’t want to make the effort to break up with their partner and find someone better. They would rather stay in a toxic relationship they already know than start a new one.
“Absence diminishes mediocre passions and increases great ones, as the wind extinguishes candles and fans fires.” – Francois de La Rochefoucauld
People should reflect on whether they would still prefer to stay with their partner if they hadn’t invested so much time in the relationship. They are being questioned about whether the advantages now exceed the costs in this question. Reducing the sunk cost of past expenses they cannot regain, improves in making the choice that best suits them. Families, friends, and society frequently pressurize individuals to remain in toxic relationships since they don’t see being single favorably and will consequently support the sunk cost fallacy of keeping up with the relationship.
In conclusion.
The sunk cost fallacy has an impact on a variety of our daily activities as well as major choices with lasting consequences. We must let go of emotional ties in order to avoid falling prey to the sunk cost fallacy in our relationships, businesses, or spending patterns. Some would claim that our devotion to possessions is what causes us sorrow. It is more difficult to accept when someone or something is failing us because of our excessive attachment to them. We must get over our anxiety of feeling like a failure, ineffective, or that we are wasting our time. Not all endeavors, partnerships, or products will be beneficial.
Pay attention and think about all the alternatives you must sacrifice in order to finish a project that is already drowning. You might cause a lot of harm to yourself and other people if you allow your pride and emotions to obscure your reasoning.
The sunk cost fallacy forces us to reflect on the past continually. How much time, effort, and energy do we invest in a project?
Instead of dwelling on the sense of stagnation or shame that comes with breaking a previous commitment, we should concentrate on doing real activities. Therefore, we must let go of the past, hope for the future, and live in the here and now. Recognize when to remove things from your life. Consider it as investing your resources in more fruitful projects rather than accepting failure. Is wise to give up a losing fight. Excessive fearlessness in the face of insurmountable circumstances will only result in failure. You can make a place for better, happier things by clearing your thoughts and letting go of your anxiety and connection to failing relationships, goods, and undertakings. Make cuts to free up space in your life for greater opportunities.