When I was in college I had a friend named Tim that had been dating his girlfriend Lauren for 6 years. Tim and Lauren were always fighting so I was shocked when they announced their engagement later that year. The next time I saw Tim I asked him why they were getting married and what he told me was unbelievable. “I’ve been with her for over 6 years.” he said “I’ve invested too much time to not marry her.”
Take a moment to really think about that answer.
Tim wasn’t saying “I love her”. He wasn’t saying “She makes me happy” or even “Her parents are rich and I’m doing it for the money.” What Tim was saying was “I don’t want to admit the last 6 years of my life were a bad decision.” So Tim and Lauren got married, and a few years later their relationship collapsed and ended in divorce.
So why did he make such a bad decision? Why on earth would someone go against common sense? To me it was obvious that getting married to the wrong person wouldn’t make the last 6 years of his life any better, but at the time he thought it was the best possible choice.
Tim had fallen victim to the Sunk Cost Fallacy. The 6 years he put into the relationship were already gone and no decision would have made those years come back, yet he allowed that “cost” to influence his decision about the future because he wants to feel justified about the time he had already to put in.
We all fall victim to the Sunk Cost Fallacy at some point in our lives. Have you ever sat through a movie you hated because you already purchased the ticket? Have you ever fought to finish a book that you didn’t enjoy because you had already read the first 150 pages? What about dragging an old friendship along that should have ended years ago? Are you working a job you hate because “it’s too late to change now” or “it’s what I went to school for”?
We all may need to learn to give up a little more often.
The Sunk Cost Fallacy is an example of a larger concept known as our Loss Aversion Bias. Loss aversion states that people are hardwired to avoid loss more than seek gains. Something deep in our brains hates losing, even if it means getting something better in return. It’s what causes people to make poor financial decisions, stay in bad relationships, or prevents us from chasing our dreams.
I’ll expand on Loss Aversion in another article, but for now let’s stay focused on the Sunk Cost Fallacy and how to avoid it.
Years ago I worked for a small business owner named Brad who manufactured performance parts for specific vehicles. As he grew, he got stretched too thin and the business slipped into cash flow problems and insolvency. He was about $120,000 in debt and losing money every month. He served a very limited market and there were only so many people who would buy his product. By that point he had already sold most of them so his customer base was drying up and he wasn’t able to move into new markets quickly enough. Brad took out more loans and floated the business for another year, jumping from project to project trying to save the business until he ran out of all options and had to close. He owed close to $300,000 and spent the next 10 years paying it back. One of the reasons he dug himself a deeper hole at the end was because he didn’t want the years of his time and money to be wasted. He was obsessed with “saving” his business.
Contrast my experience with Brad to a couple of brothers I know who spent years building their stone company from the ground up. They invested most of their lives for 5 years, creating unique products that lasted twice as long as their competitors for half the price. They made hundreds of thousands of dollars and invested it all back into the company as they continued to expand and grow, taking almost no salary for those years in order to see the company grow and flourish. Things were going wonderfully for them until the housing market started to collapse. Orders started to dry up and they realized the business was no longer sustainable. Instead of going into massive debt and dragging the death of their business along, they realized they were backing a losing horse and shut the business down. They sold off their inventory, wound the company down, and walked away debt free.
So what was the difference? The brothers didn’t let the last 5 years of their lives influence their decision for the future. They realized the only thing they needed to consider was their best options going forward, ignoring all past mistakes or investments of time and money, and the best choice didn’t involve their stone company.
The key to overcoming the sunk cost fallacy is to completely remove sunk costs from the decision process. The money and time you’ve already spent isn’t relevant. We place a higher value on avoiding loss which leads us to make poor choices. Instead, we need to look at the future costs of a decision and the future opportunity it will provide. We may find that changing gears is the best opportunity we have before us.
When you catch yourself justifying a decision with words like “But I already spent…” Stop and realize you’re falling into the sunk cost trap. Forget what you “already spent” and consider what it will cost going forward. Finishing that awful book might stop you from calling a dear friend. Staying in that failing relationship might delay your future happiness. Seeing that project through might keep you from investing in a much better one. Not changing your major now may cause you to spend 10 years in a job you hate.
If you can master awareness of the Sunk Cost Fallacy you will find yourself making those hard choices sooner, and it will be easier to cut your losses and move on to a brighter future!
Source: “The Framing of Decisions and the Psychology of Choice” ; Amos Tversky & Daniel Kahneman