The Sunk Cost Fallacy
I watched "The Walking Dead" until it finished in Season 11. It lost its way as a show, and I was 'hate watching' it from about season 6 onwards.
I watched approximately 110 episodes of a show I no longer loved because I'd invested time and effort in it and always hoped it'd get better (it didn't).
This, in a nutshell, is the 'Sunk Cost Fallacy'.
What is the Sunk Cost Fallacy?
The sunk cost fallacy refers to a cognitive bias that compels individuals to continue an endeavour, investing in a project, activity, or decision based on the amount of resources (time, money, effort) they have already committed rather than on a rational assessment of the current and future costs and benefits of continuing the investment.
How does it impact decision-making?
Apart from making us watch TV shows much longer than we should (Smallville, I'm also looking at you), it makes us hold onto our investments of time, money, and other resources because of the resources we've already pumped into them.
We continue beyond the point of reason because we've put so much into something.
This fallacy affects various aspects of life:
A project that should have stopped keeps going because of the level of investment.
A losing betting run is continued as someone hopes to recover their losses.
A career path that no longer fulfils you but you continue with because of the time you put into it.
A TV show that keeps going long after its creative mojo has evaporated.
Why do we do it?
Humans tend to demonstrate a cognitive bias called 'loss aversion'.
We hate writing off a loss. Studies have shown that we'd much rather avoid a $1 loss than make a $1 gain. The emotional energy invested in these decisions often clouds our judgment.
Groups can fall into the trap even more so than individuals. I wrote an article on "groupthink" that touches on it.
Still, sometimes peer pressure and shared responsibilities can lead to less individual accountability, and projects push well beyond tolerances, which should have otherwise stopped them because no single member feels the personal responsibility for the decision to stop.
That, frankly, is a reason why you see so much hate and war in this world; people feel that they've invested so much over so many generations into something that they cannot stop and let go despite the harm it does to them.
The Concorde
Remember when we had a passenger plane that travelled faster than the speed of sound? No? Then you're probably relatively young.
In 1976, the British and French governments saw the first flight of their joint venture, 'Concorde'. It could fly from London to New York in 3 hours. Compare this to the fastest flight today of about 5 hours.
Well, despite being a technological achievement, early budgets of £70m started to be evident that would not be enough, and the project would not be commercially viable due to high operating costs and limited market demand; both governments continued to invest massive amounts of money over several decades to the tune of more than £1bn.
The desire to recoup the substantial sunk costs and achieve the project's ambitious goals led to continued investment long after it was apparent that the project was unlikely to turn a profit.
While Concorde made a nice profit for British Airways later in life, the investment by the British and French governments was far more than their original intent, and the taxpayers picked up that bill.
How to Avoid the Sunk Cost Fallacy
Avoiding the sunk cost fallacy requires a mixture of self-awareness, discipline, and a willingness to make tough decisions based on the present and future rather than being anchored to the past. And, of course, knowing when a TV show has 'jumped the shark'.
Here's how you can sidestep this psychological trap:
Acknowledge the Fallacy
First, it is crucial to recognise that the sunk cost fallacy exists and understand how it can cloud judgment. By being aware of this bias, you're better prepared to identify when you're making decisions influenced by sunk costs rather than logical assessments.
Evaluate Decisions Objectively
When faced with a decision, objectively evaluate the current situation and prospects. Ask yourself, "What are the benefits and costs of continuing this investment?" and "If I were not already involved in this project, would I still enter it today based on the current information and prospects?"
Seek External Opinions
Sometimes, we're too close to a project or decision to see it clearly, so seeking external opinions can provide a fresh perspective. Friends, colleagues, or mentors might offer insights you hadn't considered, helping counteract biases towards continuing an unprofitable course of action. But be careful, they bring their own biases with them!
Establish Predefined Criteria
Setting predefined criteria for a project or investment can help. These should include clear goals, budgets, and timelines.
If the project exceeds these parameters, it might be time to reassess its viability. This approach helps to remove emotion from the decision-making process, focusing instead on predefined benchmarks.
Embrace Failure as a Learning Opportunity
Changing our perspective on failure can also mitigate the sunk cost fallacy. I
nstead of viewing failed investments of time, money, or effort as losses to be avoided, consider them as learning opportunities. Each "failure" can provide valuable insights and experience that contribute to personal and professional growth.
Know When to Cut Losses
The most challenging aspect of avoiding the sunk cost fallacy is knowing when to cut losses.
It's a lot easier said than done.
It requires courage to admit that continuing an investment is no longer justified. Remember, resources spent on unprofitable endeavours could be allocated to more promising opportunities.
Implement Incremental Decision Making
Break down decisions into smaller, incremental steps. This approach allows for regular reassessment of a project's or decision's viability, making it easier to pivot or abandon based on current realities rather than past investments.
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