The Sunk Cost Problem
Have you ever paid a lot of money for a fancy dinner and then been disappointed in the outcome? The steak was good, but was it $50 good? If we never have to eat there again then we'll feel a little annoyed that we wasted our money, but we'll move on; we learn from the bad experience and eat some place different next time. But what about decisions that last longer than a meal?
When we invest in something that doesn't turn out the way we thought, it can be very difficult to pull back from that investment. We look at the money (or time or energy) that we put into the thing, and we want to see something positive come from it so we stay in it, waiting and hoping, for some fruit. As time goes by, more money and more time is wasted, making it harder and harder to call it quits. This act - of staying in something just because we don't want to lose out on the investment - is called sunk cost bias. We are bias toward sticking with it because giving up means admitting we were wrong and losing the investment we made; the investment makes us less likely to be objective and more likely to make poor decisions.
In the TIME article, The Sunk Cost Fallacy is Ruining Your Decisions. Here's How, Jamie Ducharme walks us through several studies on this topic done by Christopher Olivola. One of these studies asked people to imagine that they accidentally planned two trips on the same weekend. They were told vacation A cost them $200 and vacation B cost $800. They were both on the same weekend and there were no refunds, so they were told they had to pick one. Think for a minute - which one would you pick?
If you are thinking it depends on the vacation, then you are ahead of the curve. According to the study, even if they preferred to go to vacation A, participants were more likely to choose the less-attractive vacation B just because of the money they invested.
When it comes to achieving goals, we all understand go big or go home, but what happens when we went big, and it didn't pan out? When do we give up and go home?
Achieving our goals requires us being comfortable with taking risks, but it also requires us to be comfortable with cutting losses. The more we hold onto something that hasn't proven to add value, the more we lose out. Sometimes these investments are more complicated because they involve lots of time and money, or perhaps are more emotional because they involve people. When we hire employees and invest a lot of time training them, it is more difficult to see how much they are hurting the team. We forgive more mistakes because we want to see our effort pay off. Or maybe it's something much simpler like that sweater you spent a lot of money on but haven't worn once. It's just taking up space in your closet but every time you go to donate it you think about how expensive it was so you hold on for that magical day when you'll finally wear it.
The sunk cost problem makes it very difficult to let go and move on but like most things in life, the best way to overcome it is to be aware of it. While we may have been taught as children to stick things out and never quit, you now know that sometimes it's better to throw in the towel. When you look at that sweater and start convincing yourself that one day you will wear it, remember that you are more likely to think this just because of how much it cost. What if it was given to you? Would you still want to keep it? What if it cost $5 and you got it in a Thrift Store? Would you still be holding on so tightly? If the answer is no, then donate it.
People make bad decisions. We make investments that don't pan out, we hire the wrong people, and we buy clothes that looked great in the dressing room but now don't quite feel right. It's part of life and it will likely never change but we can change how long we let those bad decisions weigh us down. We can recognize when this sunk cost problem is skewing our choices and choose to pick up those heels and embrace change. Forget about how much money you have sunk into it, if the water keeps rising then it's time to abandon ship.
