The longer you stay in a relationship or a job, the harder it might be to break up or quit. The more you’ve invested into a certain aspect of your business, the harder it could become to shut it down. But what about future costs vs benefits? What if continuing to invest in that thing you’ve already invested a lot of unrecoverable costs in will make you worse off? That’s the essence of the bias that researchers call the sunk cost fallacy, and it could ruin your future decisions and investments.
What is Sunk Cost?
The sunk cost is an irretrievable cost, it’s that which you’ve spent and cannot recover. That includes the money, time, effort, or any resource you’ve spent on something. It’s there, whether we like it or not, in both our lives and in business. In business, sunk costs are usually excluded from future decisions, the cost will remain the same regardless of the outcomes you get after spending it, so, it’s irrelevant to current and future budgetary concerns. In life, however, it’s especially difficult to exclude sunk costs.
The Sunk Cost Fallacy
Briefly put, the sunk cost effect can be observed when we choose to continue investing in something because we’ve already invested substantially in it. “That effect becomes a fallacy (an error in reasoning) if it’s pushing you to do things that are making you unhappy or worse off,” said the assistant professor of marketing at Carnegie Mellon’s Tepper School of Business and the author of a research paper on the sunk cost effect published in the journal, ‘Psychological Science’, Christopher Olivola, in an interview with TIME magazine.
Olivola’s research paper was taking our understanding of the sunk cost effect to another level, her findings suggested that our decisions are affected by sunk cost, even if we’re not the ones who spent it, even if they’re not someone close to us! He calls it the interpersonal sunk cost effect. Through conducting experiments, the participants’ behavior led him to the conclusion that we “feel that need to honor other people’s sunk cost in the same way that you feel the need to honor your own”.
But, Is It Always a Fallacy?
Philosopher and assistant professor at the University of San Diego, U.S., Ryan Doody argues that the answer is no, not always. His argument, which starts with a reminder that human beings are social creatures, goes into how we might have certain wants or needs that justify what is usually viewed as irrational decision-making based on sunk costs. “[…] making yourself easily understood while hiding your flaws will sometimes put pressure on you to honor sunk costs,” he writes.
Whether you’ve already known about the sunk cost fallacy a while ago, or this is your first time, tell us what you do to avoid it in the comments, or share it with us on 925team@925egypt.com.
