Sunk Cost Fallacy in Decision-Making｜Wise Library 1985
Sunk Cost Fallacy in Decision-Making
Sunk cost fallacy roots in foolish perseverance to former decision and former commitment. Research suggests that rats, mice, and humans are all sensitive to sunk costs (Sweis et al., 2018). A sunk cost refers to a cost that has been invested and has no potential for return in the future. Sunk cost fallacy happens so often solely because people are unwilling to see their past effort or past investment to be wasted. People hate losses. Also, it’s never easy for some persons to give up on something/someone they have invested so much effort into. A sunk cost is a cost that is not refundable, which can be financial, emotional, or time-related.
The sunk cost fallacy has a lot to do with human nature, which leads human beings to make foolish and irrational decisions. The fallacy affects a number of different areas in our careers, relationships, and daily lives. Results showed that the likelihood to stay in the relationship was higher when money and effort, not time, had been previously invested in a relationship. Do not cling to a foolish decision or a mistake just because you have invested so much time or money in it. (Reference: Is there a Sunk Cost Effect in Committed Relationships? By Sara Rego, Jonan Arantes, Paula Magalhaes）
Who is more likely to fall prey to the sunk cost effect? The sunk cost fallacy occurs due to loss aversion. Those who are bad at dealing with loss and failures are more likely to fall into the trap of sunk cost fallacy.
Example of Sunk Cost Fallacy
For instance, a person tends to finish a terrible movie or resume a toxic relationship for the sake of non-refundable time and effort. In other words, a person tends to make past efforts worthwhile by investing more time and effort on something/someone evidently unworthwhile, detrimental or disadvantageous. In other words, he ends up wasting more time and cost unconsciously or not. That’s why people who try hard to avoid sunk cost usually end up losing more than they deserve.
As to a wise decision, focus on future returns and ignore sunk cost as you weigh your options. It’s never easy to admit mistakes. However, we’d better learn when to cut losses when the signs are clear. Sunk cost fallacy clouds our judgment. Decide what you want and what you are willing to exchange for it. Henry David Thoreau says, “ The price of anything is the amount of life you exchange for it.”
Regrets and Unhappy Relationships Are Universal
This psychology helps explain why people are unwilling to end a toxic loveless relationship or a tricky project. Brad Pitt and Angelina show people that a good divorce is apparently better than a troublesome marriage. They focus on future returns and future happiness for sure. Indisputably, ending an unhealthy relationship is not for the weak.
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Arkes, H. R., & Blumer, C. (1985), The psychology of sunk costs. Organizational Behavior and Human Decision Processes, 35, 124–140.
Sweis, B. M., Abram, S. V., Schmidt, B. J., Seeland, K. D., MacDonald, A. W., Thomas, M. J., & Redish, A. D. (2018). Sensitivity to “sunk costs” in mice, rats, and humans. Science, 361(6398), 178–181.
Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12, 183–206.