The Sunk Cost Fallacy

By  CEO of Choi Ventures Inc. and an EO Toronto member

Imagine you’ve gone to your favorite restaurant. You order a great meal and but after eating two thirds of the meal, you feel full. And today, no take-outs allowed. Would you finish the meal? Many of us would. I probably would. After all, I wouldn’t want the food to be “wasted.”

This scenario is a classic case of something called The Fallacy of Sunk Costs — an emotional snare that can trap us into making bad decisions. The meal was paid for and the cost is sunk. Sometimes it’s best to let things go rather than pushing forward. Nobody likes an upset stomach from eating too much.

Sunk costs are any costs that have already been paid. You can’t recover them. They’re gone forever. So they shouldn’t factor into our decisions. But they often do—and more often than not to our detriment.

Thinking about these costs triggers a built-in loss aversion system. Developed over years of evolution, this system places more urgency on avoiding threats than maximizing opportunities. It sneaks up on us. And it causes us to make decisions based not on logic but emotions.

What’s more, the greater our emotional investment in something, the harder it is to cut our losses. So we’re constantly tripping over the fallacy of sunk costs. This brings with it all the bad things that result from making one bad decision after another.

When I was 14, I founded and invested in Dreamspec. After seven months, we weren’t very sustainable with only a few clients, and I had a hard time letting go. I couldn’t let the clients I’ve built down, but it was eating into a lot of my time and if time was money, I was definitely making $1/hour. So I finally cut it loose after one year. I thought it would be devastating, but everyone turned out okay.

At 20, I invested in an automotive publication. High printing costs, distribution costs and a declining industry were killing us. But I had poured money and sweat equity into the businesses. And worst; had people depending on me to put a roof over their head. When we made the tough decision, I thought it would be devastating, but everyone turned out okay.

At 23, I invested in private gaming. I’ve built it from ground up, and I made a lot of money in it. An average yearly salary in a month’s work. However, morals and values started kicking in—Even though money was good, I made the decision to stop. I thought it would be devastating, but everyone turned out okay.

There have been other times where I’ve had to confront the fallacy of sunk costs. But I think you get my point. Letting go of something you’ve invested blood, sweat, tears, and money into is hard, in business and in life.

The fallacy of sunk costs stops us from making rational decisions. It’s something we can’t control. And it’s powerful. It causes wars, increases prices in auctions, and keeps failed political polices alive. So how do we overcome it?

Recognize this fallacy exists. If that’s not enough, try to do what I do—create a pros and cons list. If you see that the only pro of doing something is that it makes you feel better, decide the other way. Reverse your thinking – and take emotional decisions out of the equation.

It’s noble and human to want to stay the course. It’s also admirable. But there are times when you have to cut your losses. Doing so may hurt temporarily, and you would think it will be devastating, but I’m sure you will turn out okay too.

 

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One Response to “ The Sunk Cost Fallacy ”

  1. colette on

    I do not necessarily agree, sinking money into a business I’d hard to let go of…we may not have the money or equity to reinvest over and over …for some of us, we may gave to change the business into something new…like recycle it….we are not all fortunate to get multiple try on a major investment. I think not..do not cut your losses and run…cut your losses and recycle.

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