To begin with
To begin with, the sunk cost idea refers to when an amount of money has been spent and the money cannot be retrieved, the money is said the be sunk, meaning gone (Thaler 2015). Therefore, being that the money is unrecoverable, the efforts to make the money spent put to use are significantly high, which in turn, is called sunk cost fallacy. Classic economists would refer to this type of behavior as irrational. Although in this instance, we’re referring to money, the sunk cost fallacy could also refer to time, energy or even pain. Individuals are victims of the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources. (Arkes ; Blumer, 1985). Our decisions are tainted by emotional investments and the more we invest in something, the harder it becomes to abandon it.
One may ask if it’s worth clinging onto something just because of the financial investment. Such instances are the pursuit of activities and interests that are not truly of value to us, such as staying in toxic relationships and investing money and time towards activities that we are not good at when we could be investing that time towards things that we are skilled in and for which we truly have a passion. As Thaler explains, most people get the pleasure of acquisition utility when they have paid money, and consume the product. We tend to make choices not based on what outcome we think is going to be the best going forward, but instead based on a desire not to see our past investment go to waste. Overall, people are susceptible to the sunk cost fallacy because we are afraid of loss and will do anything to prevent it.
There are many times when a person can fall prey to the sunk cost fallacy, and times where it affects our ability to make financial decisions. Unlike other bias’, the sunk cost fallacy could actually lead to better decision making in the future. For example, say a person has spent a couple hundred dollars on some news clothes, expecting to wear them often, just for them to sit in the closet, unworn. They see that the money spent on the clothes did not pay off, now they make sure to spend their money wisely, so that it does not go to waste. The next time they go shopping, they might make a list of things they need, instead of just going without anything in mind. Overall, seeing money go to waste could influence a person to make better financial decisions in the future.
However, although the sunk cost fallacy could help make better financial decisions in the future, it could lead a person to make bad decisions in order to avoid feeling the sunk cost fallacy. For instance, Thaler gives the example that a man named Vince paid one thousand dollars to an indoor tennis club that allowed him to play once a week for the indoor season. After only 2 months, he developed a painful condition, known as tennis elbow, which made it painful to play. Being that Vince already paid the one thousand dollars, he continued to play, so his membership wouldn’t go to waste. This is just one example of a bad decision to avoid the sunk cost fallacy because he made his condition worse and that may have led to doctors bills which means more money spent. That effect becomes a fallacy if it’s pushing you to do things that are making you unhappy or worse off (Olivola 2018). Trying to avoid the sunk cost fallacy could lead to bad decision-making which may ultimately lead to wasting even more money.
Part of the reason we can’t accept sunk costs, is because of loss aversion. Loss aversion is the tendency for people to want to avoid losses whenever possible. It is associated with the concept that “losses loom larger than gains” (Kahneman & Tversky, 1979). As previously mentioned, financial losses hurt more than financial gains feel good; with this fact, an individual will primarily focus on the fact that they feel as if they lost out on their investment. For example, we are more upset about losing ten dollars than we are happy finding ten dollars. Roughly speaking, losses hurt about twice as much as gains make you feel good (Kahneman, 2011).
There are tons of real life examples regarding the sunk cost fallacy, some of which have already been mentioned. Many people go about their lives and experience the sunk cost fallacy at least once. For example, a guy takes a girl on a date to the movies and spends about thirty dollars on their tickets. About twenty five minutes into the movie, the girl says that the movie is terrible and that they should leave, the guy responds that he spent a lot of money on the tickets, so they should just stick it out. The guy didn’t want his investment to go to waste, so instead of leaving the terrible movie, they sit and watch the rest of it, to get his money’s worth.
In my own life, I’ve experienced the sunk cost fallacy many times, whether it be continuing to use products that don’t react well to my face or going to a concert even though I was ill just to avoid wasting money on the ticket. Being that I am extremely cheap, and try to watch my money whenever possible, people closest to me know that I try my hardest not to let my money go to waste. However, the sunk cost fallacy, can affect anyone and probably affects most. Although the examples I have provided range from one thousand dollars and below, this could happen with thousands to millions of dollars being wasted. In my situation and I’m sure many others, it took many times of feeling the sunk cost fallacy before I started making better decisions to not let my money go to waste. The sunk cost fallacy allows for people to reflect on past decisions in order to make better ones in the future.
In conclusion, although it may be difficult, there are some ways to overcome the sunk cost fallacy. One important way to overcome the sunk cost fallacy is to keep track of investments being made. Ask yourself, should you really make this investment? Will you make use of this investment? By keeping track of investments chances of wasting money decreases because one is aware of what they are spending their money on. It’s always easier said than done, but coming to the realization that the money isn’t coming back and letting go of that attachment will help overcome the sunk cost fallacy as well. Thaler even mentions that ignoring sunk costs is perfectly rational, even required (Thaler 2018). All in all, with the sunk cost fallacy we see how much our behavior/emotions and decision-making are intertwined, in addition to how it affects many if not most of the population.