*This article was originally written for and published on my personal LinkedIn on March 30, 2022.
I’m no economist. I have no particular love for numbers. And I really can’t recall the vast majority of what we covered in the two Econ classes I took during University.
But there is one thing I remember, and it’s noticeably impacted my life: The Sunk Cost Fallacy.
This concept from behavioural economics has stuck in my mind for years since learning about it. It even drives my decision-making on a regular basis. The concept of sunk costs has helped me save time, make better decisions, and detach emotions from some tough choices.
So, what is it? Well… let’s go back to Economics 101.
The Sunk Cost Fallacy: A Primer
When I first learned about sunk costs in Econ class, the professor used a bunch of charts and graphs to explain it. I’ll spare you those and try to provide a simple overview here.
In short, sunk costs are costs that have already been incurred and can’t be recovered. In economics, it is a financial/monetary cost, but can also be applied to time, effort, or even love/affection/attention.
The fallacy part is when you make decisions based on said sunk costs, even though they are no longer relevant to future decisions or impacts.
For example, a company may wish to expand operations by building a new warehouse. It’s projected to be a $5 million project. After spending $2 million on it—which cannot be recovered—the industry takes a devastating blow.
In deciding whether or not to continue building the warehouse, the company should disregard the fact that $2 mil has been spent and only look at the future expectations, costs, and returns. It’s likely that future outcomes are not looking as promising, rendering the warehouse useless. The company is better to cut its losses and move on to a new strategy.
From the economic standpoint, using past sunk costs to make any decision about the future is an irrational decision. Because the money or sunk cost cannot be recovered, there is no logical reason to use it to make decisions for the future—money that’s already been spent is gone.
- Investopedia has some more information on the sunk cost fallacy (trap).
Real Life Sunk Costs
But we’re not always rational decision-makers, are we? We frequently make decisions based on emotions or personal reasons. We make quick decisions on gut feelings instead of doing a full-on economic analysis.
So, we fall prey to the sunk cost fallacy on the daily. Here are some examples of how it might show up:
- Finishing a movie you don’t like because you already watched an hour.
- Avoiding a career switch because you earned a degree and invested years in a certain industry.
- Staying in a relationship that’s no longer working because you’ve been together for years.
- Eating a piece of pizza while on a diet and deciding to also eat junk food for dinner since you’ve “already ruined it.”
- Keeping around a low-performing employees after investing money and time training them.
- Buying concert tickets, but ending up feeling sick on the night of the event. Instead of staying home to recover, you go because you’ve spent money on it.
These are just a few of the many day-to-day examples of where sunk costs show up in our lives. Any time we think, “well, I already invested time and money into it, I might as well continue,” we are falling into the trap.
My own real-life example of the sunk cost fallacy was surrounding a recent work project. My team was creating a document using a program none of us were super familiar with. We invested a lot of time trying to get it up to our standards, but we were struggling to figure it out.
At a point, we had to make a decision to continue with the current program or switch to something we knew better and could get the results we wanted. Knowing the sunk cost fallacy helped me make the decision to switch over and try something new, despite the time already invested.
So what does all this mean? Well, it helps us become more aware of why we are making decisions. If we are choosing to continue on a path that’s no longer working, it’s because of our emotional attachment, not because it’s a rational decision.
Understanding the principle ultimately leads us to greater self-awareness and helps us make clearer decisions.
When you recognize sunk costs, you can start looking at the situation logically. You can start making decisions that really serve you:
- You might not be able to recover time already spent on a bad movie, but you can reclaim future time by stopping when you’re bored.
- You can’t take back the years invested in a degree you’re no longer interested in, but you can switch gears and move into a career you actually love.
- You can’t turn back time and avoid meeting your toxic partner, but you can break off the relationship now and save years of future pain.
Ignore the sunk costs—that time, money, effort, or love cannot come back to you.
Move forward considering only the future and you will reclaim future time, money, effort, and love.
What are some examples of sunk costs in your life? Where have you seen this play out before?