116. What Is The Sunk Cost Fallacy?

What happens when you continue a pursuit you’ve invested a lot of time in when that pursuit stops giving you meaning or value? Some people think you should stick with it, but this is a logical trap known as the “sunk cost fallacy.”

Definition:

  • Sunk Cost Fallacy: When a person or a business sticks with a decision they have already invested time and/or money into it because they want to make sure that the time and money they spent will not go to waste. But in continuing on with a project or investment that is not working, they lose the opportunity to “cut their losses” and find something new and better to invest or engage in. 

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Here’s a transcript of our conversation:

Brittany: Hi Connor.
 
Connor: Hey, Brittany.
 

Brittany: So let me ask you a question. Have you ever been in the middle of a movie that is so bad you’d rather not keep watching it, but because you’ve already gotten like an hour or maybe an hour and a half into this two-hour movie, you feel obligated or you feel like you have to keep going to the end even though you feel like your time is wasted? Have you ever felt that way?

Connor: Yeah, you know, I felt that way actually with, some books sometimes where I’m like, well, maybe it’ll get better. May maybe, you know, I need to give it a little more opportunity and see what it is, or it’s like a project that I’m working on, like, well, I’ve already gotten, you know, this far, I’ve invested all the time. I might as well see it through. So, yeah,

Brittany: Even relationships. There are people that are like, well, you know, I’ve been dating this person for years, I’m unhappy, but we’ve gotten it two years. Like, let’s just keep going. And it’s so funny because this is such a human thing. We do this so much that maybe we don’t realize that it’s actually, it’s actually like an economics or economics economist, have a name for it. Cuz this is actually an economic principle and they call it the sunk cost fallacy. And in my opinion, it is one of the most important economic terms that we can learn because it’s so applicable to almost everything we invest time in. So, many times in our life we invested time or maybe even money into something we feel like we must follow it through to the end because we’ve given so much to it. Even if this endeavor, you know, this thing we’re doing has proven itself to be a complete waste of time. And really this to be is almost more of a psychological phenomenon more than economic. But, you know, has taught us that economics is the study of human action. So, Connor, why do you think we do this? Why do we get so invested in projects or, you know, any endeavor that really aren’t serving us anymore?

Connor: Part of me thinks it has to do with wanting to feel like we’re not being wasteful. I mean, the silly example that pops into my mind is I’m eating a meal that tastes awful. Yeah. like, yeah, but, I paid for it and, you know, it’s just gonna go to waste. And, you know, like, but like, hey, every bite I take is making me nauseous but you, I gotta see it through because I don’t wanna waste the money that I spent on it. Right? Like, we don’t wanna feel like we’re, or wasting like the time and relationship. I don’t want to come to terms with the idea that this person I was dating for a year has been, you know, a waste of my time or causing me, you know, anxiety or whatever problems that are arising in the relationship. But I’ve already invested a year, so we gotta keep this thing going. Like we, wanna feel like, you know, we haven’t been wasteful. I employ a lot of people and you know, I know some employers, some bosses, they have the sunk cost fallacy with, the people who work for them.

Brittany: That’s a good point.

Connor: If they spent months training someone, for this new position and they’re not really working out. But you know what? I spent so much on their training and we’ve sent them to this conference and we, paid them for like two or three months just to train. And they’re not doing so great right now, but I can’t fire them because I’ve been spending all this money, so I need to keep it going. I think it’s this desire not to like, feel like you’ve wasted any time or money In the past.

Brittany: You kind of reminded me with the food analogy of Vegas buffets, which are never that good, right? They’re never that good. But you pay like $40 and you get unlimited food. And so many times I’m like, all right, well I paid $40, I’m gonna go back for seconds, thirds, fourth cuz I have to get my money’s worth. And I always end up having to go lay down after it. So that was, that like struck home to me. But I’m wondering, so how can we change this mindset because it’s so hard. And even though I know this principle, and it’s something that I’ve even written about before, I’ve noticed that even I can’t do it right. There are times when I’m like, maybe I’ll just give this terrible book a few more, you know, a few, few more hours of my time. Maybe I will sit through the end of Babe, which is the movie I hate more than anything in the world. By the way, that’s the one I always use as this definition, which kids today probably don’t know, babe, but it’s about a talking pig. And to me, it is the worst movie ever made. But I remember as a 10-year-old sitting through it being like, can we leave now? Like, this is bad. So what do you think, Connor? What are some ways we can kind of train ourselves to one notice when we’re doing this and get out of it?

Connor: Well, maybe let me first add a quick thought as to why I feel like this is so important. and it’s because, throughout our life we have, choices to make. We have consequences of those choices. And if we continue to make bad choices, we’re never gonna be as successful or productive or prosperous or healthy, you know, as we otherwise might be. And so, you know, we came out with our Tuttletwins guide to Logical fallacies. And in a way, this is kind of like a fallacy. This is, you know, well, I mean, it is, it’s called the Sunk Cost fallacy. This, it’s this incorrect way of thinking that prevents you from being the best person you can. And so I think that it’s very important for us to think about how to overcome the sunk cost fallacy. You know, if you’re a younger person, maybe it’s like, Hey, I invested all this time into writing this essay. I need to just, you know, keep it going rather than starting from scratch because, you know, I’ve already put in all the time. So let me just kinda, you know, put a conclusion on it and submit it. Well, that’s probably not gonna be the best thing if, what you’ve written is not the greatest, just because you spent time on it does not mean that that should be what you kind of put your stamp of approval on. You can probably do better and it may require that you discard all of that, you know, time and effort that you put into it before. So it’s important that, we figure out how to overcome it. I think one way to overcome it is to recognize that we are, every time we’re making a decision, we’re starting from scratch. And, here’s I’ll share another example to explain what I mean. There’s, the gambler’s, fallacy, let’s say like I was playing, what were we playing the other day? It was like, sorry. No, it wasn’t, sorry. It was something with dice. We were playing a game with dice with my kids.

Brittany: Boggle? It was a boggle.?

Connor: Oh no, it was, Settlers of Katan. That’s what, or Katan if you’re fancy. And, so you’re rolling the dice and obviously, certain combinations of numbers are more common than others. And the game board kind of shows this. It’s like, Hey, you know, the sixes, sevens, and eights are more common, and so you’re gonna get more resources when you roll those numbers, but the ones and the twos, you know, are less common. And so eight, I believe was one of the numbers that was very common. And so we’re rolling and we’re rolling and we’re rolling and we’re starting to realize no one has rolled, in eight in this whole beginning. And so my kids are starting to think, well, pretty soon someone’s bound to roll in eight because it’s a high likelihood or it’s one of the more common numbers in the game. And yet no one has done that. That means that any time now, any, you know, any moment someone is bound to roll an eight because for every role where someone doesn’t roll an eight right, it increases the likelihood that that next one is gonna be an eight. Well, that’s the gambler’s fallacy because every time you roll the dice, you’re starting from scratch. Just because no one has rolled an eight in all the hundred times before does not change the likelihood of what I’m about to roll as I shake the dice in my hand, right? Every time I roll the dice, that is something entirely new and the odds of me rolling an eight are always the same. They never change just because I haven’t rolled an eight yet. Even though we kind of think like, oh, someone’s bound to roll it. Like no, every single roll is the same, percentage, the same likelihood. Okay, so going back to the sunk cost fallacy, I think it’s the same thing in the sense that we’re always starting from scratch in every decision we make. And even though you’ve spent time before, and even though you’ve invested time in that employee or that meal or that essay or that movie, right? I think it’s healthy to overcome that fallacy by recognizing that in the moment you’re making a decision that you are free from whatever you did before. You’re always moving forward just because you did stuff before, that decision should not influence the future of your decision. Yes, maybe you spent some money, maybe you spent some time, maybe you had this relationship. But I think it’s important to always be forward-looking and saying, based on where I’m at right now, where do I want to be going forward? And maybe that means that you’re gonna continue in that relationship or keep eating that meal or keep writing that essay and that’s great, but you shouldn’t make the decision going forward based on the fact that you’ve spent all that time or money or effort in the past because that is going to kind of handcuff you in the future. If I’m writing that horrible essay and then I’m like, oh, should I submit this? Should I just write the conclusion and submitted, I’m handcuffing myself for making a decision in that moment to say, is this the best I can do? Is this really what I want to submit? Is this a good job? And if I’m handcuffing myself just because, well, this is what I wrote before, I’m preventing myself from the freedom of making a decision going forward to say, what is the best thing I can do, right now and going forward? So that, that’s just kinda one thought that I think is like, we have to be willing to liberate ourselves from what we’ve done in the past. Like our past is certainly always gonna influence what we decide, but we have to not let it handcuff what we decide.

Brittany: So I have one thought and then I wanna share a personal experience. So this is not the same as quitting or giving up. I mean, you could be quitting something that isn’t serving you, but you know, playing an instrument, there are gonna be times when it’s hard and you’re gonna have to push through and you’re gonna think, oh, I can’t get this technique that, you know, this is different in the sun cost fallacy. Unless you’re realizing like, oh, I don’t wanna play the piano at all. You know, this isn’t what I want. But there are certain things, you know, we’re not saying give up. There are certain things that you do need to persevere, but you need to make that decision. the personal story I wanna share is, is my experience in college. So I went to college for about four years and I was a senior when I dropped out. And that was a really hard decision because I was like, okay, I’ve got three classes left. These three classes have nothing to do with my major or anything I want to do. I’ve gotten all the knowledge I need to get to now move on to my next job. In fact, I was already offered a job and so I had to make the decision, do I spend more time out of the workforce, or do I, you know, institute the sun cost fallacy? Kind of think like, okay, I’m, if any point from here on out is wasting my time. And I was an older college student, so at this point, I was 27 and people were already starting their careers and I was already behind. And so for me, I had to make the very hard decision to say, okay, if I keep doing this, it’s really not going to serve me. I already have a job. And in fact, you know, I work in DC which is very competitive and I’ve never had a problem getting a job because I got into the workforce. So it might, you know, these are not easy decisions to make. That was a really hard decision for me to make. But I did the cost-benefit, you know, analysis, which we’ve talked about in other episodes where I had to say, what’s going to be the best outcome for me staying in college where it’s not serving me anymore or, starting to make money and building my career.

Connor: That’s a great story. And I think, you know, we often talk about government and politics and freedom. And so I’ve been thinking through how what do we wanna say about that? And the thought that comes to mind is this when the sunk cost fallacy applies in our life, when people are doubling down on mistakes, when they’re saying, well I’ve, this far, so I’m just gonna continue, you can be punished for that. The market can punish you or your teacher’s gonna give you a bad grade, or, you know, the person in the relationship is gonna dump you, or that employee’s gonna quit, or that meal is gonna give you diarrhea right? Like, like you’re gonna get feedback, from your bad decisions, which is great, right? That, failure, those problems, that is how we learn. And, so those signals in our life are very important. So I feel like the sunk cost fallacy, as problematic as it is in our personal life, is, not impossible to overcome because we’re gonna hit our head up against the wall. We’re gonna have something negative happen if in fact it was, you know, the wrong decision to make. And we made it because of, you know, the sunk cost fallacy and we made a bad decision. So when you and I double down on these bad decisions, chances are we’re gonna kind of learn from our mistake or at least have the opportunity to learn from our mistake by failing or having a problem. But, and here’s the, but when it comes to the government when it comes to elected officials and bureaucrats and politicians, they do not experience the same, signals that we do when they make bad decisions and then double down them on them when they say we’re gonna go to, you know, Iraq to you know, fight this war and then to Afghanistan and Libya and Yemen and Samala and you know, we’ve been doing this for so long and fighting all these terrorists. We just gotta continue because we’ve already, you know, invested all this time. And we wouldn’t want the sacrifice of all of the soldiers to be for not, therefore we have to sacrifice more soldiers, right? Like when, like this government failure, do you remember the cash for clunkers?

Brittany: my goodness. Yeah.

Connor: Look at now was giving money for like clunkers or like these horrible vehicles. Cuz this idea was they’re bad for the environment and whatnot. So Congress is like, let’s give people money if they traded. Well, it’s a horrible program. And so yet it continued cuz well, we’ve done it this far, so we gotta, you know, keep spending more money. So the government never really has the experience of failure. They never really experience, the signal that tells them you doubled down on a mistake and that’s wrong and you need to stop it. They, never really have good feedback to punish them when they make mistakes again and again, which means that they continue to do so. You’re familiar Britney, with a quote that says, those who don’t learn from the past are condemned to repeat it. Well, you and I can learn from our past mistakes through these kinds of, you know, failures and bad experiences, but the government never really learns from its past. Nope. and therefore continues to repeat. It continues funding horrible programs continues, bad laws and horrible wars, and all these things because there’s no good way for the government to experience that pain and have that feedback. And so as I think of the sunk cost fallacy, I think it’s very important for us. It’s almost a good way for us to kind of learn through failure and stop doubling down on those mistakes because of the sunk cost fallacy. I just wish we could figure out a way to make the government learn too.

Brittany: No, I think you’re absolutely right on that. And I think we need to be kind of very introspective in our own life on when we’re doing this right and when we can change. So I think this is a very important topic to talk about.

Connor: Well, we will have, some resources for you on the show notes page. Head to Tuttletwins.com/podcast. As always, thank you for being subscribed. And until next time, Brittany, we’ll talk to you later.

Brittany: Talk to you later.

 

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