Ever heard of the Sunk Cost Fallacy?
I was at the grocery store the other day. There was only 1 checkout lane open and a long line of customers in front of me. Waiting around, I struck up a conversation with the guy in front of me. Really nice guy. He was headed to a Memorial Day barbecue and came to the store just to pick up some ice.
But, I had some bad news for him… I already walked past the ice freezer earlier at the front of the store, and there was no ice left. I had even asked one of the store workers if there was any other ice in stock, and they assured me it was all sold out. It was memorial day, after all, which apparently is the second biggest barbecue day of the year.
Anyway, I dropped the bad news on my new friend in line:
“Sorry bro. There is no ice left. You are lining up for nothing.”
I felt bad for him, because he came all the way to the store, waited in line for 15 minutes, and then found out that the single item he came for wasn’t even available.
But the strangest thing happened… He continued to wait in the line!
Even after hearing there was no ice, he didn’t leave. He continued to stand around, in the frustratingly long line. I couldn’t understand why.
At first, I thought he was planning to buy something else at the checkout, like a stick of gum or something. But when we finally got to the front, he asked the checkout lady if there was any ice left. She said no, and explained what he already knew – that they were sold out.
After some awkward silence, the guy dropped his head, admitted defeat, and left the store with nothing.
The Sunk Cost Fallacy:
This happens when you make decisions based on past sunken cost (time or money), rather than future upside or results.
The grocery store guy had two options when he first learned there was no ice left:
- leave immediately with no ice.
- waste more time, then still leave with no ice.
He chose option B. Why? Because he wasn’t ready to accept the loss of the time he had already sunk. It made him feel better to stay a little bit longer, and waste more time.
Unfortunately, we all do it!
As humans, we have a fear of failure, and fear of loss. We hate losing so bad that we continue to throw away more time and money just to delay crappy results, even if it’s inevitable.
Here are some other common examples that you see all the time:
- Jenny continued to date the wrong guy for 3 additional years, even though she knew it was a bad relationship, because she had invested so much time in the guy.
- Steve walked into a movie theatre and within 15 minutes knew the movie was crap. But he continued to stay and suffer through the entire film anyway, because he “wanted to get his money’s worth”.
- Martin got a masters degree in Accounting. He HATES accounting. But yet he searches for a job as an accountant, because he wants to “put his degree to good use”. Poor Martin suffers for 7 long years, before quitting and becoming a ski instructor.
- John bought 40 shares of GE stock last year. The share price went down, so he bought more. Then prices dropped further, so he bought even more. John continues to buy this declining stock, because he’s “buying at a discount compared to his original investment”.
- Stan has an expensive truck with fuel and maintenance costs 2X more than an economy car. He knows he should sell it, but doesn’t because he would never be able to recoop the time and money for all the upgrades he’s put in over the years.
- Mandy gets given the first 7 seasons of Friends on DVD for free. She goes online and buys seasons 8 – 10 only so she can “own the complete set”. Even though all seasons/episodes are available on Netflix, for free with her account.
Stop Wasting Time and Money!
So, how do we get better and fight against the Sunk Cost Fallacy?
1. Get Good At Saying NO.
Half the battle is recognizing that there is a fallacy, and teaching yourself to say NO to your basic instincts. You have choices. Try saying NO to things that are free. Say NO to anything that doesn’t add value to your future self.
2) Fail Fast, Fail Often:
The best way to overcome your fear of loss and failure is practice loss and failure regularly. I know, it doesn’t sound fun. But, cutting your losses is such a freeing activity. Like letting go of a massive burden that you’ve been carrying around for a while.
3) Let Bygones Be Bygones.
The past is the past. The very definition of “Sunk Cost” is cost (time or money) that is sunk and can’t be recovered. Since there’s nothing you can do about it, there’s no reason you should include the weight of sunk cost into your decision making criteria. Base your decisions on the future results.
I’ll conclude with this gem of a quote…
What do you reckon? Comments below!
You might also enjoy: Is it Selfish to Pay Yourself First?
8 thoughts on “The Sunk Cost Fallacy – STOP Digging!”
Fantastic examples of sunk cost fallacy. Once I discovered this concept, I became exceptionally aware of how I spent my time, money and efforts.
Thank you for sharing this concept, the more people understand it, the more people can let go of things no longer benefitting them and begin to work towards more productive decisions and subsequent actions. Learning to live better and happier will elevate us all.
Also… I lol’d at “But the strangest thing happened… He continued to wait in the line!” great stuff as always Joel!
Thanks Art! Even though I discovered this fallacy a while ago, I still catch myself falling into the trap every now and then!
what if it was important for him to learn the lesson himself.
Great point! Wonder if he’ll buy ice a few days in advance this Memorial Day?
I agree with you. I have some counter in the investment portfolio. I used to invest more monies into the specific counter when the price dropped further with the hope of averaging down the cost of the investment in that counter. I no longer do so and I will stop investing into each counter when it reach 10% of the investment portfolio. It is the tactic of spreading the eggs into many baskets which gives me the peace of mind.
I used to do the exact same thing! But now I’ve learned that the less I ‘trade’ stocks, the better I do. Ignoring my natural feelings of sunk cost and fear of missing out is working well 🙂
I never knew the term for this concept! I definitely began to notice it more when I was making bad purchases and transitioning to minimalism. I had impulse bought a camera and by the time I got it I was over it and it was pretty low quality. Either the option was to force myself to use it and end up being junk in my house which is what I would have done in the past or try to sell it even if I had to for a lower price to just get rid of it… I am working on it. I am definitely failing a lot but I am learning!
Hey Bee! Great example about the camera story. I did the same with one of my new surfboards. It’s not a good fit for me yet I can’t let it go because I’m not ready to accept the $100 loss when selling it. So silly! Failing is how we learn 🙂
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