How to Avoid Sunk Cost Fallacy

Here is simplified information about the "sunk cost fallacy" whether you have heard the expression or not.

Sunk Cost Fallacy: Definition

The sunk cost fallacy describes the habit to follow through on an endeavor where time, energy, effort, and money have been invested whether or not your investments outweigh the benefits. The sunk cost fallacy involves rational decision-making. In other words, should you cut your losses or should you continue with a project expecting things to turn around in your favor?

The sunk cost fallacy is a decision a person has to make to continue with a failing project or to cut his losses and give up even though it has cost him a significant amount of time, energy, effort, money, and other resources he can’t get back. The sunk cost fallacy provokes a person to make the decision to either keep going and invest more into a failing project or to "cut his losses" and quit without investing more.

How the Sunk Cost Fallacy Works?

Even though people might not know about sunk cost fallacy, it affects everyone at some point. It involves every area of our lives when we have to make a decision to continue with something or quit something when we realize it is not working for us.

Some people are so committed to something that they stick with a project long after they know it is failing. The sunk cost fallacy can prevent an individual from quitting even when it is in their own best interest to do so.

Sunk Cost Fallacy: Examples

If the truth is told, we are confronted with sunk cost fallacies when we don't have to be. It could involve something as simple as trying to make the best decision about getting an old car repaired or investing in a newer model. Would it be cost-effective to invest $3,000 into a new transmission into the older model or use that amount of money on a down payment on a new model that will eliminate the problems the older car has been having and most likely continue to have?

The sunk cost fallacy is like being in the middle of an ocean. If you go forward, you will have to invest more of what you have already invested without knowing if you will get what you desire. If you turn around and go back, you would have lost all of your investment. Therefore, if you decide to accept the loss and relieve yourself of the burden or continue to invest in something that looks like it will fail.

Don't limit sunk cost fallacies to always being about finances. The sunk cost fallacy can play out in a variety of other ways. Often a sunk cost fallacy involves precious time. Why watch a two-hour movie when you know you don't like it after seeing only ten minutes of it? Save yourself some time, and don't fall prey to the sunk cost fallacy.

You might have bought a book or borrowed it from the library. After reading only two chapters, you realize you just don't like the book. The sunk cost fallacy might push you to finish the book because you invested money and time in reading those first two chapters.

Ways to Avoid the Sunk Cost Fallacy

You can avoid the sunk cost fallacy by logically thinking through some things before jumping into the water.

• Make a pros and cons list to help you decide your options.
• Consider the time you will have to invest.
• Think about the energy and effort that it takes for the project.
• List out all the costs you will incur if you move forward.
• Think about what you have lost and are yet to lose by moving forward.
• Think about what you will gain if you move forward without failing.

Final Words

Many people are likely to continue with an investment even if it would be a rational decision to give it up. They might feel guilty and label themselves as quitters. Know that if you give up a losing endeavor, you are not a quitter just because you give up on one particular thing.