The Sunk Cost Fallacy: How Past Investments Can Cloud Our Judgement
The Sunk Cost Fallacy: How Past Investments Can Cloud Our Judgement

Read time: 2 min

This is one of my favourite physiological theories because we often experience it.

The Sunk Cost Fallacy describes our bias to follow through on an endeavour if we have invested time, effort, or money, even if the current costs do not outweigh the benefits.

Let's say you are planning a day trip somewhere. You invest time and money in planning the day and booking the train and activity.

On the day you start feeling ill, know that if you go out for the day instead of resting, you risk making yourself sicker and not having a fun day.

Your previous investment clouds your judgement in making the best choice at this moment. You'll most likely choose to go on your trip instead of losing money and time.

You can see examples of the Sunk Cost Fallacy in your daily life, whether making plans, managing investments or changing jobs.

We make decisions based on past costs instead of present and future costs and benefits, which are the only ones that rationally should make a difference.

The Sunk Cost Fallacy Cycle: Recognise When to Break Free 

The Sunk Cost Fallacy is a vicious cycle because we continue to invest money, time and effort into endeavours we are invested in. The more we invest, the more we feel committed and the more resources we are likely to put in to follow through on our decision.

It's partly explained by Loss Aversion Theory, which is a cognitive bias that describes that the pain of losing something is psychologically twice as powerful as the pleasure of gaining.

Think about the last time you found a £10 note on the floor. I am sure you were happy, it was a nice win but think about the last time you lost £10. How did that make you feel? Probably substantially worse.

Recognizing the Signs of the Sunk Cost Fallacy: When to Re-evaluate Your Decisions

Think about the Sunk Cost Fallacy next time you're making a decision, big or small. It's often easier said than done as it's difficult for us to ignore our emotions.

Ask yourself whether I am doing this because it's best for me going forward or because I have invested time into it. If you struggle to be objective, try asking a friend or family member. They can often look at a situation more objectively than you.

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