![]() Hal Arkes and Catehrine Blumer did an experiment several decades ago about the psychology behind sunk cost. There was a popular study done a long time ago that confirmed how strong of a hold sunk cost fallacy has on our minds. Sacrificing money or time because of a sunk cost bias is an amateur move, that even most professionals make. Also, even if the monetary expected value has not changed, if your happiness EV(which I’ll write about in an upcoming post) has changed relative to where you’ve invested time or money, you should still cut your losses. Most people have not trained their mind enough to overcome the sunk cost fallacy to make an additional $100k. Sunk cost bias would convince them that they can’t give up the initial project or they’d lose $5k. If you already invested $5k in a project where the EV is $50k, and you find an opportunity where all else is equal(time, happiness level, etc…), but the EV is $150k, most people would let the $5k they invested on the previous project keep them from gaining an extra $100k on a better opportunity. The opportunity cost of bypassing a higher EV option is essentially choosing a -EV option, no matter what your sunk cost is. Or, we may have discovered better opportunities, so maybe it is still +EV, but no longer +EV relative to the new opportunities. We may not have even made a mistake, it might have been +EV at the time, but is no longer +EV based on changes in the market or new information we didn’t have before. Most people want to conceal what could be conceived as a mistake. Well, for a logical person, it’s illogical to think that’s illogical. If someone can’t think logically, they won’t understand why you spent money on a project, then didn’t do anything with it. A lot of times we make the irrational decision to succumb to sunk cost bias because subconsciously we may feel the need to justify our decision to irrational people. Sunk cost bias has enormous control over most people’s minds, influencing them to make incredibly flawed decisions.Īt the risk of getting too philosophical on you, let me bring up one other reason the sunk cost fallacy often controls our decision making. Not only would most people answer the question with no hesitation, pretty much everyone would choose the project they’d invested $25k in, even if the expected value or happiness from the other projects were higher. You don’t even know the EV of each project or your level of enjoyment from them. Well, if you’re like most people, you’d answer this question without even asking for more information. I tell you that you have to eliminate two of the projects, and only focus on one. You have $1,000 invested in one project, $5,000 invested in another, and $25,000 invested in the third. Let’s pretend you have three projects going on. Sunk cost bias has a crippling effect on the illogical mind. We compound -EV decisions, with more -EV decisions. We tend to compound our mistakes because of our failure to separate emotion from logic when in the moment. Just because you happened to make a -EV decision in the past, doesn’t mean you should keep making -EV decisions. I know of many people who’ve invested money into a project, and incorrectly make future decisions based on feeling committed to the project, even after realizing it probably wasn’t optimal. I mean that specifically related to sunk cost fallacy and the impact not overcoming that mentality has on your results. Well, the previous time or money spent should be irrelevant to future decision making.Ī lot of people allow their past to determine their future, and I don’t mean that as some regurgitated inspirational quote. I can’t count how many times I’ve heard, “but I’ve already invested X amount of dollars”, or “but I’ve already spent Y amount of hours”. Sunk cost fallacy leads to -EV decisions, which leads to suboptimal results, which leads to decreased long term happiness. This is a bigger problem than you realize, and it’s negatively impacting your life. We’re wired to believe that the time or money we already have invested into something should be factored into our current decision making. Even people who understand expected value(EV) can fall victim to this trap. We incorrectly value the sunk costs we have as more than $0, which leads us to suboptimal decision making. So, why is this important? Well, most people fall victim to sunk cost fallacy, which means we often make incorrect decisions when it comes to sunk costs. The definition of a sunk cost is a cost that has already been incurred and cannot be recovered. ![]() In this article I’m going to explain how it may be controlling major life decisions of yours in very negative ways, without you even realizing it. Have you heard of the term sunk cost fallacy before? Many people haven’t, and even if you have you may not fully understand the impact it has on your life.
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