Have you ever overordered food and ended up force-feeding yourself? If the answer is “yes”, have you wondered why? There could be two reasons: to avoid food wastage and/or to get your money’s worth. If your reason was the latter, then you are a victim of Sunk Cost Fallacy.
We know that stuffing extra food into us is just going to make us feel uncomfortable and maybe even unhealthy. But still, we continue to do so only because we have spent money on food. There is no logical or rational reason for doing so; we are purely guided by our emotions.
The two main reasons why we fall for this fallacy are – the difficulty to admit that we took a wrong decision in the past (over-ordering) and the inability to accept the loss (stuffing yourself so that money is not wasted).
Sunk Cost Fallacy is our tendency to continue with a deed if we have already invested time, effort, or money into it, whether or not the benefits outweigh the cost. To understand this concept better, let’s split the words “sunk cost” and “fallacy” and analyse their meaning.
Sunk cost is any amount that is spent, which is not recoverable. If you had bought a gold class ticket for Santhosh Pandit’s movie, irrespective of whether you like or dislike the movie, the money is lost and this is a sunk cost.
Fallacy means something that a person or a group of people believe in, but something that is actually not true. Astrology is an example of this. While many of us believe in it, there is still no scientific evidence to prove its validity.
To sum it up, this importance we attribute to the “cost” we’ve paid is false and does more harm than good. Let’s delve into why understanding this concept is important for each one of us.
Application in Relationships
Many people choose to stay in toxic/unhealthy relationships only because of the past time and effort they had invested in the relationship. They are not willing to acknowledge that the ship is sinking in the present and that there is no hope for the future. All that matters to them is to prove that their choice in the past was correct. Unfortunately, this is not “Love”. They are unknowingly becoming victims of sunk Cost Fallacy.
Once people understand this concept and accept that their way of thinking is illogical. It can either help them to move forward in life or work towards repairing the relationship in a more rational manner.
The Malayalam movies Uyare and Veruthe Oru Bharya have beautifully portrayed this fallacy. The female protagonists in both these movies stick on to their unhealthy relationships due to various past reasons and ultimately, it leaves them in despair.
Application in Business
When a business/start-up fails or starts incurring a loss, many entrepreneurs follow the motto of “Do not give up”. Perseverance is a good trait, but if it stems out of the fear of realising that you’ve made a bad investment, then the continued hard work and effort put into the business would be futile.
We should enter/invest in a business only based on rational factors such as market conditions, government and environmental policies, legal and political scenarios, etc. If your business is raking in losses, analyse why and pivot. Doing the same thing and expecting better results is falling for sunk cost fallacy.
Malayalam movies Varavelpu and Indian Rupee showcases this fallacy in action.
Application in the Stock Market
If the price of a stock you have invested in falls, what do you do? Many of us don’t sell it, either we continue holding it or buy more (downward cost average). What if the price falls again? And imagine one day the stock just goes to zero!
This is not a scenario you’d face if you bought the stock based on fundamentals and bought at a time when the market priced the stock reasonably. But if you’re holding on to a stock, despite the company showing declining revenue and bad fundamentals, you’re doing so because of sunk cost fallacy. You’re better off selling it (you can offset the loss to save taxes) and investing in a better stock.
Other Examples of Sunk Cost Fallacy from Our Day-to-day Life
A few other examples of sunk cost fallacy are:
- You continue to use an old mobile phone despite lack of storage space and/or speed issues, only because you had spent a lot of money to buy it (this guilt is especially stronger if is an iPhone)
- Watching all 3 hours of a boring movie in the theatre because you don’t to “waste” the money you spent on the ticket (you’re wasting your time, and time is money!)
- You are on a diet but broke it by having payasam for lunch. At dinner, you convince yourself to have a burger because you already broke your diet during lunch (this is a classic example of using the past to justify decisions in the present)
If you analyse further, you will find many such situations in your life where you fall for this fallacy. And the simple solution to free yourself is by being aware of this fallacy and taking more informed decisions in life.
Pursuing something that is making you unhappy is not going to bring back the effort/money/time spent on it, but it is going to make you feel worse. So learn to keep the investments made in the past aside, and focus only on the present scenario while making decisions.