First things first, what is a logical fallacy? 

A logical fallacy is an error in reasoning seen in people so often that scholars gave the phenomenon a fancy name. Understanding how to spot and identify fallacies in yourself and others is a priceless skill. Over your life, this skill will save you time and money. It will also spare you some of your dignity.

 

Today we’re going to focus on a fallacy known as the sunk cost fallacy. In economics, a sunk cost is any cost that has already been paid and cannot be recovered. The sunk cost fallacy tells us that a person is likely to follow through with a commitment, regardless of how poorly it is going, if they’ve already invested a great deal of money, time, or effort.

This fallacy is so common that there’s even an idiom warning us not to fall for it. When you hear someone talk about “throwing good money after bad”, this fallacy is precisely what they’re talking about.

We see it play out in real life all over the place. 

 

When I used to play Texas Hold’em with my family on Saturday nights, inevitably someone *cough* I’m lookin’ at you mom! *cough* would keep betting even though they knew they were playing a losing hand. Having already thrown their money in the pot, it would feel like a waste if they didn’t see their hand all the way through to the end. It’s called “chasing the pot,” and it’s super annoying when you spot this sort of thing. 

(And let me just add, it’s incredibly irritating when your mom ends up winning the pot because she hits a lucky card on the river, which ends up fueling her belief that her strategy works, which only perpetuates the cycle of terrible logic… but I digress.)

 

You may not resonate with the poker stuff, but here’s a situation I’m certain will hit home for you. Have you ever had a hard time getting rid of an item because you knew you paid a lot of money for it? Have you kept an item tucked away in the recesses of your closet for years because of this? If you said yes, then you’ve experienced this fallacy of thinking. 

Here’s the thing– an ill-fitting sweater isn’t going to magically morph to your body shape one night just because you dropped $150 on it on an impulse. Keeping something around just because of how much you spent on it doesn’t bring your money back. The truth doesn’t care how much you spent. A sweater that doesn’t fit is just a sweater that doesn’t fit, and keeping it around will only remind you of a past decision that now makes you feel bad. That is why this way of thinking is flawed. 

 

But losing a hand of cards and leaving an overpriced sweater in your closet won’t cause you much pain, at least not in the longterm. However, when this flawed way of thinking is applied to degree programs and career choices, the damage can be quite costly. 

The sunk cost fallacy could be the reason you stayed in a field of study long after it stopped inspiring you. This flawed way of making decisions could be what’s stopping you from walking away from a job that you no longer love. You’ve already invested so much time and effort, not to mention all the money you’ve poured into this endeavor. After all that, how could you possibly walk away?

 

So why does this happen, and better yet, what can you do about it?

 

I know you think you’re a rational decision-maker, but the truth is we’re all far more emotional than we’d ever like to admit. As human beings, we’re often under the influence of our emotions. When we have previously committed to a choice, we are likely to feel guilty if we do not follow-through on our decision.

We can’t recover whatever time, effort, or money that we’ve already expended, but we fail to take that into account. We end up making decisions based on past costs instead of present and future costs and benefits, which are the only ones that truly matter.

 When we fail to follow through on a decision, we frame it to ourselves as a failure, even if the decision to abandon ship was in our best interest. We would rather attend a concert in the cold, sleeting rain than “waste” our $50 ticket by staying home (where it’s warm and dry and you don’t even have to wear pants!) That sense of failure and loss feels real to us, and it causes us to make irrational decisions.

Unfortunately for you and me, it can be challenging to overcome inherent cognitive fallacies. BUT,  challenging doesn’t mean impossible. Reading this article and becoming aware of this fallacy is a massive step in the right direction. Here are a few other tips to help:

 

  • When making a decision, check-in with yourself to make sure you’re focusing on current and future costs and benefits instead of past commitments.
  • Direct your attention to the concrete actions you can take instead of fixating on your feelings of wastefulness, guilt, or regret.
  • Make a pro and cons list to help you stay objective and out of your feelings. (P.S. If the only pro you can come up with is the time/money/effort that you’ve already invested, it’s a clear indication that it’s time to pivot.)
  • Make decisions with your overall goal in mind. It’s easy to obsess over losing a few dollars, but you’ll benefit by bringing your focus back to the bigger picture.
  • Ponder this question when a financial decision has you tied up in knots; Will I be worse off if I eat this cost now or keep putting time and money into this commitment?

 

Whether you’re evaluating your investments, contemplating a career move, or just cleaning out your wardrobe, knowing about the sunk cost fallacy can help you make more logical decisions in all facets of your life.

 

Now I’m curious, where has the sunk cost fallacy most recently come up for you?