Let’s look closer at a concept that many of us are familiar with but may not fully understand – the Sunk Cost Fallacy. This cognitive bias, often described as throwing good money after bad, has implications in various aspects of our lives, from personal decisions to business strategies. Let’s explore the Sunk Cost Fallacy in detail and uncover how it influences our behaviors and decision-making processes.
The Sunk Cost Fallacy revolves around our tendency to consider unrecoverable costs, such as time, money, or effort, as a reason to continue investing in a losing proposition. It reflects our reluctance to cut our losses and move on, even when faced with evidence that suggests we should do so. This irrational behavior is rooted in our emotional attachment to past investments, leading us to make decisions based on what we have already committed rather than focusing on the present situation.
The video discussion highlights several examples where the Sunk Cost Fallacy manifests in everyday scenarios. From over-ordering food at a restaurant to staying in unfulfilling relationships or clinging to failing business endeavors, we see how the fear of loss and reluctance to admit mistakes drive our actions. These examples serve as a reminder of how deeply ingrained the Sunk Cost Fallacy is in our decision-making processes.
The discussion extends to the realm of business and investing, where the Sunk Cost Fallacy can have significant implications. We learn about the Concorde fallacy, named after the ill-fated Concorde jet project, which serves as a cautionary tale of persisting with a losing venture due to past investments. The discussion also touches on the impact of this cognitive bias on small businesses, emphasizing the importance of recognizing and addressing sunk costs to ensure long-term success.
To combat the Sunk Cost Fallacy, the discussion emphasizes the role of emotional intelligence and mindfulness. By cultivating self-awareness, self-management, and mindfulness, individuals can better navigate their emotions and make rational decisions free from the influence of past investments. Honesty, courage, and the ability to let go of sunk costs are key components of overcoming this cognitive bias and moving forward with clarity and purpose.
In conclusion, understanding the Sunk Cost Fallacy is crucial for anyone seeking to make informed decisions and avoid falling into the trap of perpetuating losses. By recognizing the signs of this cognitive bias and incorporating emotional intelligence and mindfulness into our thought processes, we can break free from the cycle of sunk costs and make choices that align with our present goals and values.
We hope this exploration of the Sunk Cost Fallacy has provided valuable insights and perspectives on how cognitive biases can impact our lives. Stay tuned for more discussions on behavioral psychology and decision-making in our future blog posts. Thank you for joining us on this journey of discovery!
Note: The preceding blog post was generated by AI and may have minimal editing. The transcription below is AI generated but has been edited by a human for accuracy. The original video content is entirely human and imperfect.
Hi. Today we’re talking about something probably all of us know intimately, and that is called the Sunk Cost Fallacy. It’s another cognitive bias. It’s a cognitive bias, and it’s easily described, commonly described as throwing good money after bad. Oh, we have done that baby. Well, we refuse to cut our loss.
Yeah, very common. We’ve all done it. I mean, it’s, it’s, you know, it’s natural. So, um, what makes it irrational? What makes it a fallacy is that we are looking at unrecoverable costs, things we can’t get back. Right, right. And as a, as a reason to spend more, to invest more or put more time in whatever, whether it’s time or stock market.
Listen, it’s, it’s a lot. Yes. Stock market is one. So that’s that. We’ve talked about that and it’s, since you brought that up, it’s very closely related to another cognitive bias that we’ve talked about called the loss aversion bias. Yeah, I know that one. We don’t, it’s more painful. It’s about twice as painful to take a loss as it is to, to win as, as it is pleasurable to win. So people tend to look at, um, they, they want, if they’re gonna put a dollar in, they want to get $2 back, or they don’t wanna do it because of that, because of that imbalance. I mean, it’s a, it’s a, it’s been studied that, that one’s been studied a lot. Sure. So has this one.
I mean, this, this was, there were articles everywhere about the Sunk Cost Fallacy from Investopedia, which is, you know, one of my old favorite sites from, uh, my investing days to, um, well, Wikipedia, you know, a bunch Uhhuh. But anyway, there’s a long list of, of, uh, sources that I’ll, I’ll include. Um, okay. Here, so here’s one example.
Okay. Oh, to, just let me recode, let me restate. So we’re talking about the, when we’re looking at something from the past, something we’ve already done or already spent mm-hmm. And then deciding, you know, making a decision in the present. So it’s, it’s kind of the past versus the present in this thing. Okay.
So here’s an example. People order too much food, more, you know, their, they call it eyes bigger than their stomach. Right? Right. And then once it’s in front of them, they feel like they have to eat it to get their money’s worth. That’s Oh, can never heard of to-go boxes? Well, I have good, and that’s how I do it, but, um, okay.
Another one. Relationships. Oh yeah, I’m guilty. Yeah. Yeah. Are people will stay in relationships mm-hmm. Longer, you know, be because that aren’t working for them. Mm-hmm. Because they’ve invested so much, too much time to leave. Mm-hmm. Or, or they’ll just, they’ll be embarrassed. And, and that’s, I think that’s the key is, is there’s this fear of, of how you’ll look or, or how you’ll feel.
Or maybe oroma or maybe, um, you know, there’s another phrase, uh, the devil, you know. Right. We’ve talked about that a little bit so that that uncertainty will, will put up with something that’s not working that we’ve already, you know, that’s because it’s familiar rather than going to something that’s unfamiliar.
So there’s another cognitive bias that we’re, that I think we’ve done that’s connected, oh, we’ve done it all. Yeah. Heck yes. We’re not perfect and I’m, quit trying. Well, I’m saying fomo. Fear of missing out. Oh, fear missing out. Yeah. You know,
fear missing. You actually said it yesterday with somebody that, that you were working and it’s like, Dump ’em and you’re going, no, but I’m afraid they’re gonna miss something that they’re going to say that’s gonna trigger.
No!
That is exactly what triggered me to, to pick this cognitive bias for this was your pointing out to me. Cut your losses. You said those words. I did. Cut your losses and, and yet was it, it’s something I paid for and, and turned out to be, to have very low value and, and the guy just keeps changing the product and, and come up with new things to sell me with your head and messing with my head.
Marketing. Un-friend him!. So there’s marketing, uh, you know, one of the things that in general ti things in marketing is, is this principle of, you know, want wanting to get us to, , to convince us that there’s more value in what we’re buying mm-hmm. Than what we’re paying. You know, so it’s kind of the flip side of it, okay?
Mm-hmm. Here’s another example. Um, people sometimes have argued that it’s, uh, a war. I, I can think of the, like the Vietnam War mm-hmm. Must be continued because so many, if they don’t continue the war and to to a victorious conclusion, they’ve wasted all those lives.. All the lives that were lost have been wasted and all the money.
And all the effort that we made
to, so, I, I mean something. Yeah. We happen to live through, uh, one of those right in our life that Oh, like several, but it’s, it’s, it’s been argued. Okay. A, a very famous example. In fact, it’s so famous that this fallacy, this sunk cost fallacy has also been called the Concorde fallacy.
Do you remember the Concorde jet? Oh heck yeah. The Supersonic jet that went two times the speed. Yeah, yeah, yeah, yeah. The French government, the British government and engine, like jet engine makers in both countries all went together for this project, right. To build the Concorde Uhhuh. Okay. They had an estimate of what it would cost to build Uhhuh before they’d finished building the planes.
The cost overruns were so big they already knew it wasn’t gonna be profitable. Right. They’d never make a profit. Right. And they wouldn’t have built it anyway. Oh yeah.
And the first time there was an accident,
they cut. Well, that was, that was the sunk cost fallacy in, in action. They’d already spent so much and put so much time into it, they were gonna go ahead and build it, even though they knew it wasn’t gonna ever make money.
Okay. That’s interesting. Um, individuals in scams. Yeah, we’ve,
okay. We, yeah, my father got caught
up
in one of those Yes. An investment scam that promised, you know, huge returns and, and just, you know, ended up breaking, just keep putting more in and more in and more in uhhuh. So, um, they’ll put, they’ll keep putting in time and money and emotional energy Oh.
Into a project. Despite that, I’m, I mean, I’ve got a bunch of notes here. Despite doubts, you know, they’ve got some doubts, right? There’s, there’s hints there. They, but they don’t want to, you’re sending a
plane for them. They don’t want to admit it. Oh, heck no. No. That was
an ego thing. Okay. So that’s, that’s one type of scam.
What about the, um, the, the love letters and, and you know, Facebook, whatever the, the relationships that get started from some, oh, I want to say a lonely woman. Um, you know, who falls prey to a man in another country, someone pretending to be mm-hmm. This guy and, and it, there’s nobody behind it, or, I mean, it’s, it’s just a scam to, to extract money.
Yeah. Yeah. Um, I think catfishing is, is part of the, the name of that, but, uh, so that, that’s another kind of scam. Uh, psychic advisors. Oh yeah. We don’t, don’t wanna leave mom outta that. Oh no. Um, lots of money on that one too. So, so those are some examples of, of scams where, where somebody gets.
Falls falls into it. And then, and then they don’t want to admit they’ve been, they’ve been fooled. Yeah. Okay. And so they stay, they, you know, they continue to hope or
they stayed in a business that was dying and they, but they were going to do it cause they didn’t know what else to do.
Okay. So how does this, it, it’s, in many cases it’s trying to get even.
It’s, it’s trying to get back to, and that mm-hmm. You mentioned the stock market, so that mm-hmm. That, where that can happen is, you know, we’ve, we say we bought a stock mm-hmm. At, you know, $50 and, and it fell to, you know, $40. Well, we think it’s gonna go back up, and so then it falls to $30 and then, and at some point it falls enough.
That it just, it feels like that. Um, there’s, there’s no point in, in cutting your losses. You know, it, it can’t go any, it just can’t go any lower. And well, of course we’ve seen, you know, companies get delisted all the time, so it can go to absolutely go zero. Apple is the only one
that I, that I know of the turnaround.
It, it, it was Uhhuh went for $5, a rare exception. Rare exception. And, um, so, okay, so the, uh, how does this affect small business? Because, you know, we’re focused on business. Yeah, yeah. Okay. Well, think about that. Concorde. Businesses buy equipment all the time. Mm-hmm. Or they, uh, expand into another location.
Mm-hmm. Or they want to create a new product line. Mm-hmm. Okay. Mm-hmm. Um, I, I actually, uh, fell into it a little bit when I, I was, you know, promised, uh, some expansion in a project I was in, and I hired help.. Ahead of needing them. And, and then, you know, I had a sunk cost and I kept them longer than I needed to.
So I, I confess again to, you know, to falling prey to this. But if, if you, if those decisions turn out to be mistakes, it’s important to, to recognize it and, and look at it in the present moment, you know, and say, okay, is this, is this working? And if it’s not, then cut your losses.. And understand it.
And, and to realize what it is that you’re right, what the emotional toll as well as the, it is the, uh, Financial toll is.
Oh, you’re setting me up so perfectly.
Oh, I am. I, I do that. So pride… because I’ve never read this… disguised as protecting our image. Yeah. Okay. Is, is part of this that we’re, uh, why that decision would be delayed. Right. Okay. Uh, now another, another business cost, another side of the business rather than not coming from the owner, but employees, an employee that’s unhappy in their position, they may have been there for a while.
Right. And they’ve, they’ve become unhappy. They’re, uh, who knows? Uh, it may be related to the job. It may not. Um, or they may have outgrown the position, you know, they may, they may just be stale. Right. And that’s growth through a, a company or through a position is, is natural. Mm-hmm. So if, but if they decide not to move, not to change because it’s, you know, it’s maybe they’re afraid it’s gonna be more uncomfortable to change than to stay where they are, but they’re unhappy.
What is the cost of that? Yeah. In, you know, to the company? Well, well, and to
the, and to the employee.
Well, the, the cost to them, yes. Certainly Uhhuh, but also in terms of the company, right. The effect of how does it affect the business? Well, you’ve got low lowered productivity. Mm-hmm. Because an unhappy employee is unlikely to be very productive and, and then about them.
And then their, what, whatever mood that they’re bringing, that dissatisfaction that they’re feeling is going to infect others. It’s going to be in the, in the workplace. So it’s important to be, you know, monitoring, uh, for employee satisfaction, engagement. Right. That’s a big thing. Yeah. Okay, so now we talk a lot about emotional intelligence.
How does this relate to emotional intelligence? Right. Well, the first two quadrants of emotional intelligence are self-awareness. Knowing what we’re feeling. Mm-hmm. And being able to identify it. And then self-management, you know, what do we do about that? About what we’re feeling. So, um, we need to be able to notice what we’re feeling accurately.
And then, uh, if we, when we get caught up in this fallacy, we’re trying to get back to even, oh, okay. So we’re, we’re trying to somehow recover something we, since we’ve already lost. Mm-hmm. And we don’t want to admit it. So that’s, That’s where we need honesty. We need honest, to be honest with ourselves, and we need to admit that it’s not coming back and let it go.
Mm-hmm. Okay. And then we, and, and that’s where the courage comes in. So we need both honesty and courage. The Okay. Courage, you know, part of that self-management is, you know, summoning that courage. Right. And, and, you know, being willing to own our mistakes. Right. And, and it’s not always a mistake. It’s not, it’s not happy either.
Sometimes times just change. Okay. And then, yeah, sometimes we, yeah, our needs change. Well
needs change, but the economy changes or. Or Covid comes back in or many, you know, crap happens. What are you mama do or
not? And lastly, mindfulness. So how could mindfulness help? Cuz that’s another, you know, kind of related to, it’s part of our self-care and it’s part of the, um, it’s related to emotional intelligence.
Okay. So mindfulness, uh, one of the effects of mindfulness is being fully present. Right. We, I mean, it’s about getting, getting fully right here, right now and noticing everything around us and what we’re feeling. If we do, we need that to, to, we need to be fully in the present and looking forward when we’re.
Uh, getting past this sunk cost fallacy. Yeah.
Because otherwise we’ll project that. Oh, it’s still gonna be over there. It’s still, it’s still gone out. I, I, it’s very
focused. I can see it. It’s very focused. In the past, we’ve, we’ve paid for this, the money. I, well, okay. I, I’ve remember how I am about, um, garage sales.
Yes. I can’t get over, I can’t stand to be at the garage sale, but, cause I can’t get over what I paid for something. Right. Right. I can, we’re selling something for a dollar that I paid $20 for, or mm-hmm. $5 that I paid a hundred dollars for. Mm-hmm. And it, it just, oh, fries his cookies. So really bad. That’s, An example of of, you know, staying attached to that past, that’s that sunk cost fallacy in right there, or, or there’s, you
know, in my closet there’s a dress that I paid a lot of money for with the hopes that I would get down to it, and it’s still sitting there looking pretty on the hangar and not on me.
And, and you know, another one of those, we, we could go on and on, but Oh yeah, yeah. Do we spend, you know, at times, do we spend money fixing something, fixing a car, fixing up a house? And, and, you know, knowing, right? We, we do have to be able to evaluate what the value of some, you know, if, if we repair something, what is the value of it, right?
Versus, um, oh, we’re gonna have to pay back selling it as is, right? So, uh, you know, in the real estate market, a lot of times pe you know, people will do a coat of paint or they’ll, they’ll fix up a, they’ll spend money fixing up a kitchen. In a house, they’re never gonna, they’re not planning to live in because it adds, they’ll, they’ll get twice that out out of it in terms of the sale price.
Right. Okay. So that’s an example of a, you know, making a decision right now about the future, about if I spend this money, will I get a return on the money? Right. It’s, but it’s not, it’s, it’s very important to separate that from what you paid in the past and money you’ve already spent, that you can’t get back and it’s not related.
So it’s, it’s very much about being right now, right? So that is the sunk cost fallacy and, and a lot connected to it. I hope you’ve enjoyed. Our little discussion here and we look forward to seeing you. It brings up a lot of stuff.
It’s life. Life isn’t messy. It is. It is life and it is messy. And we learn. That’s right. Hopefully. So we look forward to learning with you in another video. Bye. Thanks. Bye.
