The Sunk Cost Fallacy And How To Overcome It

If you’ve never heard the term, Sunk Cost Fallacy — be patient…you will. It’s one of hundreds of what are known as ‘logical fallacies.’ In simple terms, a logical fallacy is an error in reasoning that makes an argument invalid. This means that the conclusion being drawn DOES NOT FOLLOW from what preceded it.

The danger with logical fallacies is that they often SOUND SO CONVINCING. They seem to make good sense to us. When actually they’re unsound reasoning and should be rejected. So why learn about arguments that are unsound? Two reasons. The first is that we will more likely KNOW a logical fallacy when we SEE IT. And second, we’re less likely to be PROPAGATORS of logical fallacies ourselves. There’s enough confusion and unsound thinking in the world NOW. We certainly don’t want to contribute to the epidemic ourselves.

So what is the SUNK COST FALLACY? The sunk cost fallacy occurs when people irrationally continue an activity that no longer meets their original expectations. But why would anyone do this? Why not just quit? The reason they don’t quit is because of the time, money, and energy they’ve already invested. Some examples should help.

Example 1 – The Awful Movie

You decide to take in a movie. So you buy your ticket and take your seat in the theatre. After about an hour of viewing, you come to the conclusion that this movie is AWFUL. It’s not interesting or entertaining and it’s going nowhere.

So you have a decision to make. Do you continue to watch the movie or do you leave so you can pursue more fruitful activities?

You decide to stay and watch the entire movie simply because you already paid for it, and you’ve already invested time in it. You determine that because you already have a stake in the movie — that the best use of your time and money is to watch the entire thing. But this would be a case of falling for the sunk cost fallacy. Consider the following points:

You’ve already spent the money and you can’t get the money back.
You’ve already invested an hour and you can’t get the hour back.
The only relevant question is how you can best spend your NEXT HOUR.
To stay and watch the entire movie is to waste ANOTHER HOUR in addition to the one you’ve already wasted.

Trying to get a refund for the movie cost may be worth pursuing. Or if you’re convinced that the movie will get BETTER in the second hour — it may be worth your time to stay. But to stay for the extra hour just because of what you’ve already invested would be foolish and unsound reasoning.

You’d be better off to count your loss and move on. To consider it a lesson learned. Your time and money have already been spent and cannot be recovered. This is why we call it a ‘sunk cost.’ Think of it like a ship that has already sunk. You can’t prevent the sinking. You can only decide what to do IN VIEW OF the sinking.

Example 2 – The Slot Machine Gamble

Another illustration is what is called the ‘gamblers trap.’ Which is just another form of the sunk cost fallacy. You’ve been playing the slot machine at a local casino for a couple hours. You’re down $200. Ouch. You can’t decide whether to stay at the machine or abandon it. You reason, ‘Well, I’m already down $200, so I should keep playing so I can win it back.’

This sounds like a reasonable plan. It’s not. The $200 you’ve lost is not more likely to be recovered if you continue to play the slot machine. In fact, you’re more likely to lose more than the $200 you’ve already lost. Your best move is to leave the slot machine, if not the casino itself (unless you just enjoy the activity for its own sake and don’t mind losing money toward that end).

But the sunk cost fallacy keeps you at the slot machine. You convince yourself that the solution to the bad investment is to invest more money in the bad investment. This is much more common than we might think.

Example 3 – The Unpalatable Meal

Have you ever gone to a restaurant and ordered a dish that you ended up not liking? But because you paid for the food, you felt compelled to eat every bite? What’s that about? It’s about the sunk cost fallacy.

The belief that somehow we’re better off to eat a meal we don’t like simply because we paid for it. How nonsensical. Is it not bad enough that we paid for what we ALREADY ATE that we didn’t like? Why condemn ourselves to additional food we already know we don’t like? Why not learn from the experience to avoid this particular dish or avoid this particular restaurant in the future? And move on.

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Example 4 – The Picnic Conundrum

Say you’ve planned to go on a picnic and the weather is beautiful. So you pack up your picnic basket and head for the park. But just as you get everything set up for your picnic and take the first bite of your fried chicken – it starts to rain. Hard.

What’s a picnicker to do? You’ve already invested time and effort to get to the park and start your picnic. You’ve got a stake in this. You’re already here, the food is ready to eat, and if you leave, you’ll miss your picnic. So you sit there at the picnic table eating your picnic food while the rain pours down on you and the food.

This illustration is almost comical because we know we’d make a dash for the car and drive back home. Disappointed…yes. Foolish…no. But in the common sunk cost fallacy scenario, we would remain in the park during the rain storm and refuse to get out of the rain because of what we’ve already invested. Hopefully this helps us see how foolish and senseless the sunk cost fallacy actually is.

Example 5 – The Failing Friendship/Relationship

The sunk cost fallacy also extends to relationships. The scenario goes something like this. You’ve had a friendship with a particular person for a long time. You’ve had fun together; you’ve been supportive of each other; you’ve enjoyed each other’s company. Well, at least you USED TO.

But over the past few years your friendship has gone south. You argue much of the time you’re together and you no longer feel the support of your friend. They’ve betrayed you a few times. You no longer enjoy your time together. So why continue the friendship? Simple, you say. It’s because of your investment in them.

You have a long-standing stake in the friendship. You’ve got too much skin in the game to abandon it now. Really? Why not just recognize that the friendship has outlived its purpose? That the friendship served an important role in your life for a season. But that season and that purpose no longer exist. To continue your friendship is to relegate you and your friend to times of disappointment, frustration, disillusionment, and heartache.

How much better it would be to end the friendship on friendly terms. Then move on to better and more satisfying friendships. But we keep the friendship just the same. And we again fall prey to the sunk cost fallacy.

Sometimes we enter a relationship under false premises, false promises, or false expectations. This is very common. But what do we do when we realize we’ve done this? It would not be wise to abandon a relationship too quickly. Relationships take time. They require nurturing. They require focus and energy. But sometimes in spite of our efforts. In spite of our commitment to do our best — the relationship no longer works.

We know it no longer works. But we fight the honest assessment and admission that it no longer works. We don’t want to accept that we’ve invested so much in what is no longer fulfilling. We just won’t admit to ourselves what we know is true.

I’m not suggesting that we throw in the towel at the first sign that things are not what they once were. It’s wise to devote effort to resolve the matter. To determine whether we should make adjustments, repairs, or modifications that might restore what once was. Investments in relationships should not usually be abandoned quickly.

There are exceptions, but usually it takes time to know whether a relationship can go the distance. But when we come to the realization that it cannot — and yet we refuse to take action because of our investment, we’ve again been taken captive by the sunk cost fallacy.

Example 6 – The Stock Market Misjudgment

Keeping in mind that the original context of the sunk cost fallacy was economic, we’ll go with one final example. You’ve decided to invest in a particular stock. So you buy 10 shares at $100 per share. You now have $1,000 invested. But soon after you make the purchase, the stock begins to tank. In one month, it’s lost half its value. In another month, it’s lost 3/4 of its value. What do you do?

You conclude that you can’t sell the stock or you’ll just lock in your loss. It seems senseless to abandon the stock when you already have money in it. So you decide to ride it out in the hope that the stock will recover. But the sad fact is that the money you’ve lost has already been lost. It’s already a ‘sunk cost.’ It cannot be retrieved like returning a product to the store for a refund. Your $750 is gone. Your options are to sell the stock and keep the remaining $250. Or hang on to it in the hope that it might go back up. But by doing this you also risk losing the remaining money. As Kenny Rogers once said:

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run

Why Do We Fall For It?

The sunk cost fallacy applies to many areas in life. To a business, a job, a career, a car, a relationship, a marriage, a project, a plan, a home, a property, a dream. And we find ourselves victims of the sunk cost fallacy more than we might like to admit. But why? There are several reasons. Here are some:

We feel that to abandon the original investment is to admit failure. We don’t like to believe or admit that we failed. This is unfortunate, because failure is just part of life. We all fail regularly. Failure is one of our best teachers. We learn from failure far better than we learn from success. So when tempted to fall to the sunk cost fallacy because of a reluctance to admit defeat or failure — get over it. Just admit that you failed and move on. It’s more sound reasoning. And it’s perfectly okay to fail. It really is.
We stay the course when we should abandon it because we want to justify our previous decision. If we buy a certain stock, or buy a certain product, or formulate a certain plan — we feel ownership. And we’re uncomfortable later admitting that we made the wrong decision. Staying with our previous decision justifies to ourselves that it was the right decision. Even when it was not.
We fool ourselves into thinking that the future will be different than the past. Even if we have no evidence for that. If you’ve lost at the roulette wheel 10 times in a row, there’s absolutely no reason to believe or expect that the next turn of the wheel will be favorable. The odds are just the same as they were the other times. We need to understand and accept that they are.
We focus on the sunk cost rather than on the future benefit. We dwell on what we paid for something rather than on its current and future usefulness. We think that holding onto something that no longer works is better than just honestly admitting that it no longer works. Sometimes we just won’t accept that something no longer works that once did. We focus on the past rather than on the future.

How To Avoid The Sunk Cost Fallacy

So what should we do in light of our tendency to throw good money after bad? Or to remain on a sinking ship until it goes down? How should we respond when the sunk cost fallacy is calling us to blindly follow? Here are some suggestions.

Realize that past cost cannot be recovered. Money, time, energy are already spent. They cannot be recovered once they are.
Recognize that investing in the past does not obligate us to continue investing in the future. We can simply stop where we are, assess, and change direction. As the American humorist Will Rogers once said, ‘If you find yourself in a hole, stop digging.’
Ask yourself if you would make the same purchase or make the same investment today — regardless of what you did yesterday.
Consider the potential future value of what you’re considering rather than the past cost.
Realize that by continuing in the direction you’re currently going, you forfeit a potentially better new direction.
Understand that sometimes the best move you can make is to quit. Get over the stigma associated with quitting. Quitting is a sensible response when the goal you were pursuing is no longer within reach, or the goal will no longer deliver what it once promised.
Learn from the mistake you made in your original decision without being held hostage by it.
Learn when to hold them and when to fold them.
Try to recall a time in the past when you decided not to pursue what was no longer promising, and the benefits that accrued to you as a result.
Remember that although you cannot recover what you’ve already spent, you can choose not to spend any more on what no longer gives you a return.

We’re surrounded by the siren call of the sunk cost fallacy. Learn to recognize it for what it is. And learn how to not become one more of its victims.