What Is the Sunk Cost Fallacy?

Commentary

My family growing up did not go out to eat much at all. Maybe twice per year. When we did, it was to a cafeteria, a thrilling place for a kid. The food line starts with the salads, moves to the vegetables, and then moves to the meat. Then comes the bread, and the desserts start, and one’s eyes start to go crazy. You pay for what you put on your tray.

My father used the occasion to teach lessons. I loaded up way too much on my tray, and my father paid. We began to eat, but I was full already before even half was gone. I was disappointed in myself.

My father looked at me gently but with a bit of correction: “Seems like your eyes were too big for your stomach.”

That’s an interesting metaphor for a child to process because these two body parts are of very different sizes. Imagining my eyes as large as my stomach was a strange thing. Had my eyes really become gigantic? In a way, yes. I apologized.

What he did not say was “You must eat everything on your plate.” Why not? Because that would have been engaging in the sunk cost fallacy. It was cost enough that he had to pay for food that was not eaten. It would only add further to the cost to force me to eat it and then get sick. In effect, by not forcing me to eat more, he was cutting his losses.

The sunk cost fallacy seems to be a permanent psychological affliction of mankind. We see it everywhere. You pay $15 for a movie ticket, but 20 minutes in, you realize it’s terrible. Instead of leaving, you stay until the end because you already paid for it. That’s very common, but it is a huge fallacy. It’s cost enough that you paid; you only add to the cost by sitting through a movie you don’t like.

It’s common in restaurants. You get a meal that you don’t like but eat it anyway because you paid for it, and thereby have an even more miserable experience. The right solution is simply not to eat it.

At the bar, you order another beer, but the first one was a bit stronger than you anticipated, and you are feeling uncomfortably tipsy. The beer comes. You know you should not, but then you think: “It is here, and I’m paying for it anyway. Might as well force it down.” Huge error! You have doubled down on your miscalculation.

You have been in a relationship for five years, but it is not working out. You feel you have invested too much just to walk away. Many 1970s love songs commit this fallacy. The right answer is always to wash your hands of the whole thing and move on.

You have been at a job for 20 years, the second in charge, having built large parts of the operations and success. Your boss has grown jealous and even disdainful of you. But you cannot leave because so much of your professional career is invested here. It’s the hardest thing in the world, but you need to walk away. Just go and never look back. Otherwise you are only adding cost and likely delaying the inevitable.

A small business spends $2 million developing a product that isn’t selling and has no realistic path to success. Instead of cutting losses, executives keep investing more “to not waste what we’ve already put in.” They just keep doubling down more and more.

It’s this way with investment. You sank too much money in the Moderna stock, and now it is in the tank. You are thousands deep and are desperate to make it back. You ride it all the way to the bottom because you could not psychologically let go. Sunk cost fallacy.

You have this older car that you keep having to pay to keep running. The bills get gradually higher, and each time you think, “That’s the fix, and now it is ready to go.” This happened to me until finally I paid the big bucks for a new transmission. It didn’t feel right after, just a bit boggy. I finally woke up and stopped making excuses. I traded it in. Sunk cost fallacy fixed.

You are at a wholesale grocery and buy 5 pounds of crackers that were on sale. You get them home and hate them. You cannot make yourself throw them all out. So you gradually keep eating them for months, which only adds to your misery. It’s bad enough that you made the mistake, so it is better that you not keep adding to your mistakes by eating the crackers.

You have spent four years in school and have a $150,000 debt, training to be a musician. There are no remunerative jobs, and you have become burned out of music anyway. You keep trying and trying to make it work. And why? Because you have invested so much. Again, big error. Better to pivot to a new profession and do your music as a side gig.

You embrace a big ideological cause, whether socialism or nationalism or libertarianism, and you back a certain party and leader. It’s going really well until things turn for the worse. The leader betrays all the core principles, but he is your leader. You cannot turn your back on the party and movement, because it has defined your life and your ideals. “If I walk away now, what has my life been worth?” This is the sunk cost fallacy.

A person adopts a religious outlook that has great benefit until the benefit stops. The leaders are corrupt, the mythology of the story becomes clear, and you have many friends within. You hang in there even though you have lost credulity because you are just too deep. The right solution is to step away with integrity and start fresh, but it’s a very hard choice because you don’t know what is on the other side.

Staying in a job you hate is a typical example. You have health care, you have a rising 401(k), you moved to take this job, and you have achieved much. But you grow increasingly disdainful of your manager, your colleagues, and even the office itself. You imagine that you are too deep in to let it go. So you suffer, more each day, until it is misery itself. The right solution is to begin looking for other work or otherwise plotting an escape toward financial independence. But it is a hard step.

The sunk cost fallacy thrives because of a fatal presumption in our minds that is always present. We like to believe that whatever we do today is an investment in our future. We see our successes as cumulative, adding more and more each day in a progressive vision of where we are headed in life. For this reason, we are much quicker to calculate victories than to admit errors and mistakes.

Avoiding the sunk cost fallacy means admitting an error. Maybe you can admit one small error but not a gigantic one: spending years in school, years in a relationship, years in a job. The higher the cost, the less likely we are to admit that it is not going well and needs to end for us to start a new chapter. That takes courage. This is precisely why the sunk cost fallacy never goes away.

How best to fix this problem? We need to become as skilled in recognizing errors as we are in congratulating ourselves on wins. This is true in our private lives, but it is true of our political leaders too, people who are prone to massive errors, lockdowns and wars among them, but among the least likely ever to admit them. This is why politics seems often to be a world stage of the sunk cost fallacy.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.