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The Sunk Cost Fallacy is our tendency to continue with a project when we have already invested a lot of money, time, or effort in it, even while continuing is not the best thing to do.
We might be thinking: “If I quit now, all those hours, sweat, and tears were for nothing,” while the rational thing to do might be quitting. This can easily become a vicious cycle because we continue to invest money, time, and effort into endeavors we have already invested in. The more we invest, the more we feel committed to continuing the endeavor, and the more resources we are likely to put in to follow through with our decisions.
This fallacy impacts many aspects of our daily life, as well as bigger decisions that have long-term effects. When we are focused on our past investments instead of our present and future costs and benefits, we make irrational decisions that are no longer in our best interest.
Examples of how the Sunk Cost Fallacy bias may influence your choices:
• “This book is terrible, but I need to finish it because I have already started.”
• “I feel full, but I continue eating as I have paid for the food.”
• “After investing $35,000 into this, what’s another $3,000?”
• “I hate my job, but I’ve invested many years in getting to this point in my career.”
• “He treats me badly, but I’ve invested five years into this relationship.”
• “We can’t sell the stock now when it’s fallen so much. Let’s wait until it goes back up again and then sell.”
• “Our company has a CRM system in place; even though it’s outdated, we cannot simply change it. There was too much time, money, and effort invested in it.”
What are cognitive biases?
Cognitive biases result from our brain’s attempt to simplify information processing — studies have shown that we receive roughly 11 million bits of information per second, but our conscious mind can only process about 40 bits of information per second.
To handle the information overload, our brains take mental shortcuts that help us make sense of this incredibly complex world with relative speed. These biases mostly relate to memory, attention, meaning, and acting quickly.
Cognitive shortcuts can lead to unconscious or implicit bias, severely affecting how we perceive and act toward other people. They can lead you to misinterpret information from the world around you and affect the rationality and accuracy of decisions and judgments.
By becoming more conscious of our thought processes, we can train our minds to adopt new thinking patterns that help us mitigate the effects of various biases, so we can make better decisions.
