What is the Sunk Cost Fallacy?
Our tendency to follow through with an action — even when it no longer makes rational sense — because we are influenced by what we’ve already invested in it.
Why is it a problem?
We get irrationally fixated on sunk costs — investments we cannot recover. It’s hard for us to “give up” on sunk costs. This prevents us from making smart decisions about where to invest resources we haven’t committed yet.
The Sunk Cost fallacy is fascinates me because it shows up in our everyday lives in really sneaky ways. It doesn’t always play out in life-altering ways like the video above.
Here’s an example.
Imagine that you and I are roommates. Our current lease is up, and we’re looking for a new apartment. We find an apartment online that seems to fit the bill. We are excited about it, so we contact the agent — who is nice, a little slow to reply, but nice, so it takes a few weeks and a lot of back and forth for us to schedule a viewing. Nevertheless, when we finally secure a time, we are enthusiastic and feel lucky that the place is still available.
It’s now the day of the viewing. When we arrive at the place … it’s terrible, and not at all what we were hoping for; the agent conveniently downplayed some dealbreakers, and the crappiness of this apartment is instantly obvious as he opens the door and begins his tour.
What would you do at this point?
The Sunk Cost Fallacy in Everyday Life
Most people would stay for this pointless tour, politely nodding and courteously asking questions; and when the agent wasn’t looking, sharing knowing side-eye and raised eyebrows with the roommate.
This combination of social pressure, together with the momentum of your previous actions, is the heart of the Sunk Cost fallacy, which perniciously permeates our personal and work lives.
To get good at spotting the Sunk Cost fallacy, train yourself to listen for these phrases. Whenever you hear someone say these … you’re likely hearing someone on the cusp of falling for the Sunk Cost fallacy:
“Oh well, I might as well just finish it”
“I can’t stop now, I have to get my money’s worth”
“I don’t care, I’m going to get it done, no matter what”
The Sunk Cost Fallacy in Business and Marketing
The Sunk Cost fallacy shows up in our personal lives all the time, but also in our business lives.
The mediocre conference
There’s a conference you’ve been wanting to go to for a while. You spend hundreds of dollars for the ticket and another few hundred for the plane ticket.
You arrive at the conference, and a few hours into the 3-day conference, it’s clear that the attendees are not as “high quality” as you would have liked, and the talks you’ve attended have been mediocre.
Do you feel like you have to stay for the rest of the conference?
The website redesign from hell
You join a company as its first marketer. As one of your first projects, you decide to redesign the website, which is terribly outdated and likely costing the company revenue. You’ve been wanting to do this for a while; you mentioned it during your interviews, and the CEO got excited about it.
It’s now your first month on the job. Lacking internal resources, you decide to get an agency involved with the project. It’s your first project; not wanting to get a reputation for crappy work, you pick a top-of-the-line agency, which happens to charge top-of-the-line prices. Wireframes are created. Color schemes are decided. You like the work the agency has produced. The project is humming along, until suddenly it isn’t … the agency, becomes difficult to work with, and slow to respond. (You assume they got a bigger client, one who is now commanding all of their bandwidth.) Frustrated, you fire them halfway through the project.
It’s now your 3rd month with the company. You decide to continue the project internally. You are now working with internal designers and developers. You ask them to pick up where the agency left off, but your lead designer points out significant flaws in their work, while the developer disagrees with the technical decisions that the agency made, thinking them short-sighted. You ask your CEO to chime in, and she says that she likes the agency’s work and thinks we “shouldn’t just throw it all away.”
What would you do in this situation?
The difficult career choice
You’re a VP Marketing at a Fortune 500 company. You are recognized as one of the leaders in the industry; you’ve written popular books, get invited to headline conferences and you have a giant social media following.
There’s only one problem: you’re really not into marketing anymore.
At some point, you got bored of your career, but you just kept winning — it felt wrong to stop. You didn’t study marketing, get an MBA, then work your way up the career ladder just to stop when you’re at the top and raking in the dough and accolades.
But you really hate what you do.
Do you give it all up to do something else, or do you keep going, hoping it will get better?
How To Deal With It
In all of the above cases, the momentum of previous decisions clouded the present decision.
The Sunk Cost fallacy is a problem because it puts blinders on us. Obsessed with sunk costs, we’re unable to make rational calculations about what action will result in the most benefit.
There are two ways to help prevent us from falling victim to the lure of chasing after sunk costs.
First: Think of the Opportunity Costs
What are you giving up in order to chase those sunk costs?
Picture a gambler who keeps putting money on the table because he has to “win back his losses.” Instead of putting $1,000 on the table that he is mathematically certain to lose, what else could he spend that $1,000 on? An epic party? A spa day with the wife? or just leave it in the bank?
Similarly, picture a company that’s spent millions of dollars developing a product. Early market feedback is negative and it looks like a dud. Instead of further investment and continuing to push the product — what about taking those resources and putting them towards another project that has a higher return?
Second: Avoid Committing To a Specific Outcome
The insidious thing about the Sunk Cost fallacy is that there’s a hidden social aspect to it.
It’s bad enough that we feel an innate drive to try to recover sunk costs; it’s made worse when we feel that people are watching us and judging us.
That entrepreneur in the video above has completely tied his identity to his business idea. He’s told his friends and family that he will succeed, no matter what. He’s publicly committed to a specific outcome. He likely also believes in the “people should always continue despite negative feedback” trope, which is classic Survivorship Bias.
Well, the world is too random for us to be able to declare victory 100% of the time.
If you’re going to publicly commit to an outcome — especially something as difficult as starting a business — then you better have a mastery over the inputs to that outcome.
Now that you can better spot the Sunk Cost Fallacy in your life, does that mean you will never “fall for it” again?
Well, it’s complicated.
While it’s good to realize when you’re falling for the Sunk Cost fallacy, sometimes you’ll realize that it may actually be best to continue, despite sunk costs:
Personal factors. Perhaps you need to prove something to yourself. Maybe you want to build a habit of following through on things that you’ve started.
Social factors. We must accept that we don’t live in a totally rational world. Optics matter; credibility matters; a reputation for commitment matters. We value people who follow through on their promises, even when things are difficult.
The potential outcome is worth it. Maybe you’re starting a business that requires a big investment to start, but the potential is a really outsized return on success. The expected value is positive, despite short-term losses, because the potential is huge. (Think: Tesla, Amazon, Uber)
The point is, it’s not a cut-and-dry decision to avoid the Sunk Cost fallacy all the time.
But if you’re going to flirt with the Sunk Cost fallacy, do it intentionally, with your eyes open.
Make it a conscious choice, not blindly like everyone else.