“Don’t cling to a mistake just because you spent a lot of time making it “ – Unknown
There is currently a point of contention in my marriage.
It’s around a refrigerator
About three years ago we bought a new one. A month after the warranty lapsed the ice maker quit working. Recently the fan started making a funny noise. We have tried to have it repaired. Basically, “they don’t make them like they used to” is what we are being told.
I am of the mindset let’s just get a new one. My wife thinks we need to stick with this one, because we have already paid for it.
Sunk Cost
The situation above represents the economic principle known as the sunk cost fallacy. Sunk cost is defined as letting money or time already invested in something effect future decisions.
Let’s say you pay $50 for a nosebleed seat at a basketball game. You’re walking into the arena and see a friend who has an extra ticket for court side seats that he gives you for free.
Do you say, “No thanks I already have a ticket? ”
No, I hope you take the court side tickets.
Sunk cost would be letting the money you already spent on your tickets influence your decision about taking the better seats for free.
How often do you hang on to something (a car, a piece of clothing, an appliance) even if you are not satisfied, just because you’ve spent money on it?
Ignore Sunk Costs
The common business advice is to ignore sunk costs.
Why?
If a business never moved on from every bad decision the results would be crippling. The worst rationale for keeping on with a decision is that you have already spent money on it.
That money is gone you are not getting it back. However, the impact will live on indefinitely until someone pulls the plug.
Common Examples
- The movie is awful, but you sit through it because you already bought the ticket.
- You feel obligated to finish a bad novel, because you paid for it.
- You paid a non-refundable $100 for a class that teaches you how to interpret your pets emotions. After two classes you hate it and Fluffy still won’t open up. However, you stay enrolled, so you don’t “lose” the money.
Money
While you may never be able to avoid a bad purchase. You should at least be able to identify when you are falling prey to the sunk cost fallacy.
If your excuse for persisting at anything is “I have already spent the money” then you have already given into the sunk cost fallacy.
Just like our refrigerator. Is it worth sticking with a broken one, just because we have already spent the money on it?
It is very easy to let money spent hold us hostage to bad decisions. If you have something that you don’t enjoy or is not beneficial you have already lost the money, move on.
Time
Sunk cost can also be applied to time.
How often do you keep doing something that you are absolutely miserable at just because you have already invested a lot of your time into it? A hobby? A career?
Think about how many people stay at a job they hate just because they have done it forever?
Don’t let the years of piano lesson keep you playing the piano if you hate it
Don’t let the years you spent in college keep you in a profession you are miserable in.
Do not let the time you have already spent doing something influence future decisions about whether or not to continue with it. Because you’re not getting your time back, so start looking ahead.
People
The sunk cost fallacy can also be applied to relationships as well. If the reason you feel like you can’t move on from being around a toxic person is because “I’ve known them all my life” or “we have been friends since college” you are falling victim to sunk cost.
Don’t let the time you have already invested in a relationship influence the future of the relationship. Particularly, if being around someone makes you miserable.
Is the job worth that difficult co-worker?
Is that friendship worth being put down all the time?
The only caveat to this is marriage which comes with the whole “for better or worse” thing on the front end. Although, the refrigerator has definitely brought out some “for worse” moments lately in our marriage.
Ask One Question
The first step to avoiding the sunk cost fallacy is to recognize it. If you find yourself letting any past investment (time, money, relationship) influence your future decisions you may be falling into this fallacy.
Next time you are facing a potential sunk cost situation ask yourself one question:
Is being miserable in my current situation worth the resources I have already invested?
If you answered yes, then by all means forge ahead.
However, if you answered no, then this may represent a sunk cost situation.
What are some potential sunk costs in your life?