The sunk cost fallacy often plagues us in life. We make decisions based off of prior efforts, regardless if the effort was a success or failure. I’m sure we have all been guilty of making irrational decisions because of this sunk cost fallacy. Why do we do it? Well, that’s a whole other article or maybe book but today I want to discuss one way you can avoid this fallacy in your daily decision making.

The sunk cost fallacy is a psychological phenomenon in which we make decisions based off of prior efforts and the amount of money or time spent, regardless if the effort was a success or failure. The sunk cost fallacy is often why people continue working at jobs they hate because they have already invested so much time into them. It’s also why people continue eating bad food after having made poor choices in their diet.

How it all started?

Story time!

It was 1956! The French and British Governments decided to create this fancy Supersonic Airplane. They all got in the room together and sponsored the Supersonic Transport Aircraft Committee to build this plane. They called it “The Concorde”. The project was estimated to cost around 100 million dollars. The years went by, plans keep re-iterated, the financials went through the roof, and the financial gains they once had, were diminished as well. This would not offset them. However, the project continued. The manufactures and governments followed through on the project because they had already made significant financial investments and dedicated a lot of time to the project. Ultimately, this led to millions of dollars being wasted, and Concorde operated for less than 30 years.

This is called Concorde Fallacy which led to a cognitive bias called “The sunk cost fallacy”. If governments and large companies like those involved in the Concorde project are susceptible to cognitive fallacies like the sunk cost fallacy, it is easy to see that significant amounts of money, time and effort are wasted because the sunk costs would never be recovered regardless of whether the project was abandoned. Since governments are sometimes using tax-payers’ money for projects, their adherence to the sunk cost fallacy can negatively affect us all.

Why it happens?

The more we invest in something, the harder it is to let go of it. This can be a problem when we invest time, money or effort into a project that’s not going well. It can also happen when we make small decisions that lead to larger ones later on. For example, imagine you want to go out with friends but are feeling lazy and don’t want to get ready. You say no at first, then decide to just stay home because you feel like going out would take too much effort — even though staying home means less fun with your friends who have already made plans.

Our brains value losses more than gains of equal size. It makes sense from an evolutionary perspective: We need to pay extra attention when we lose something valuable so that we don’t make the same mistake again in the future. But sometimes this instinct gets in our way because it can lead us to make poor decisions as soon as we make any kind of investment in something — even if it doesn’t seem like much at first.

How to avoid it?

Here are four ways to avoid the sunk cost fallacy:

1. Look at future costs and benefits before making a decision about whether or not to continue investing in something today

2. Don’t use past performance as an indicator of future performance; past performance does not guarantee future returns (and vice versa)

3. Remember that it’s possible for an investment that hasn’t performed well in the past to perform well going forward

4. Recognize it and take it as a lesson that life had taught you and share it with the world because trust me, you are not alone.

Takeaway

The problem with sunk costs is that they aren’t relevant to current decisions — only future ones. However, people often rely on them when making choices because they feel like they can’t afford to let go of something they’ve already spent.

In reality, though, sunk costs are just that — sunk. They can’t be recovered, and they shouldn’t factor into future decisions you make. The lesson is to recognize when sunk costs are playing a role in your decision-making and try to separate them from current ones as best as possible.

If this article resonated with you, you may want to read this article which will help you to skyrocket your productivity.