There’s a bug in our system, a malicious presence in our head. And we let it run its course too long too often.
Let me take you through a five-minute tunnel and you’ll come out a more rational person on the other side.
We’ll start with baby steps.
Remember finishing that terrible book because you were too deep in the story already? Or pushing through the mess of a show’s final season because you’ve been a fan for years? (I’m looking at you, Thrones)
We’ve all been there.
Most people that buy a ticket to a concert and take a trip to attend it will stick around till the end even if it’s a complete disappointment.
— “We came all this way already!”
— “We paid so much for the ticket already!”
Makes sense, right? Except, it doesn’t. Because it’s a double loss.
You’ve already spent your money. Already lost your time. Listening to a band putting on a bad show will only add to your losses, not recover it. What makes you stick around then?
The Sunk Cost Fallacy
Sunk cost refers to money that has already been spent and cannot be recovered. In a business, costs of advertisement or research and development are some of its sunk costs. In a simple example, if advertisements don’t bring customers and research fails, there’s no way to retrieve those expenses — even through future profits or selling its assets.
Time being a cost too, this amounts to the idea that anything you’ve put into a project or cause — if you can’t get it back, it’s sunk.
This understanding is a widely applicable gem from the economist’s toolbox, and being aware of it can radically change your life.
Let me show you how.
It’s more common than you realize
Here are some examples of relatively small effects of sunk cost bias —
- You stay longer at parties you don’t enjoy, because you dressed up and traveled there.
- You hoard clothes and furniture you don’t need, because you spent money on them.
- You engage in activities that give you no joy, because you already made elaborate plans.
- You publish sub-par articles, because you’re already two hours and a thousand words in.
Now let me quickly flash you some of its greatest hits —
- You keep studying in a discipline you don’t identify with
- You stuck in terminally bad relationships
- You eat food that can damage your health
- You skip on switching to a better career
- You stay stuck in a horrible job
- You maintain investments certain to fail
All of that originates from essentially one seemingly harmless idea — “I’ve put so much into this, I may as well go on.”
So while you’re already at a loss having spent time, money and effort into something that isn’t working out, you’re doubling your losses by continuing to remain in the process.
I wish that was all, but I have bad news.
This is What You’re Losing
So it’s established you can’t make bygone efforts worthwhile by having more of something bad.
But there’s another angle to it. Let me walk you through it fast.
Economists talk a lot about opportunity cost. Put simply, opportunity cost is the alternative you forsake when you make a choice.
We hate opportunity costs, but they can be hard to spot.
Let’s say you go to a restaurant and order a pizza you never tried before. You were curious, so you didn’t order your usual favorite. The pizza arrives and your smile disappears after the first bite.
Now you’re thinking, “Should’ve just ordered my favorite!”
Pizza was easy. Let’s lift something heavier.
One morning you decide to quit your day job to start freelancing. There wasn’t much forethought, research or introspection but you’re motivated to use everything in your arsenal for it. You’re not going to back down and you’ll push through every setback that hits you.
Ready … set … hustle!
Two years down the line, the work has lost its charm, you’re burning out. You realize it’s not really for you. It was unexpectedly unrewarding. You’ve changed as a person and you’re worse off now — emotionally and financially.
Then it hits you on one of your worst days.
You could have been promoted at your day job by now. You’d have better stability, more time for loved ones and weekends for hobby projects. You got really sold on the promise of “emancipation from corporate slavery” whereas the job you left behind was actually pretty damn solid.
That anguish you feel is the weight of regrets about the path not taken — the opportunity cost.
Now We Complete The Circle
Get this —
Every moment you spend on something not worthwhile, simply because you put too much into it, is a moment you are forsaking the opportunity to do something better.
You’re accumulating opportunity costs on top of your sunk costs, and it’s all happening outside your focus.
This means, acting under the bias, not only are you adding to your irrecoverable losses by staying locked to something bad, you’re also actively depriving yourself of something better.
All the little steps you are taking today to hold on to something bad will hit you extremely hard years later in the shape of all the things you could have done instead.
Opportunities to have great relationships, better health, fulfilling careers and comfortable living you turned a blind eye to because you’re too attached to the rotting status quo — they can crush your morale when you realize.
Jump (the sinking) Ship
Some projects start rough and become worthwhile later. Some businesses need insane amounts of initial effort before you can sit back and watch your worth multiply. Relationships may need a lot of work and time to mature and flourish.
Just because something is unpleasant doesn’t mean it’s a net loss.
But the point of understanding this bias is to know that when past investments are the only reason you’re stuck to something unrewarding, it’s time to jump the sinking ship.
Welcome to higher rationality.
You’ve crossed the tunnel with me to the other side. Now go make better choices.