Sunk Cost Fallacy: Why We Keep Holding On Losses

Have you ever had an experience when you are doing something that you know will no longer be productive or may even cost you more? Still, you stayed anyway because you already put in the time, energy, effort, or money?

For instance, have you ever finished reading a book you didn’t like because you are already in the middle part and don’t want the time you spent reading to go to waste?

Then some keep up with the jobs they hate simply because they don’t want to waste their college education by venturing into an unrelated field outside their degrees.

If you know what it feels like based on any of these examples, then you have already experienced the sunk cost fallacy.

What is Sunk Cost?

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Before delving into sunk cost fallacy, we must first learn what a sunk cost is.

I first heard the term sunk cost from my accountant sister. She said that if an expense has already been incurred and can no longer be recovered, it is already a sunk cost.

Basically, suppose we have already spent our money on something. In that case, we should consider it sunk and can no longer be refunded or retrieved.

Doing this will change our mindset, and letting go will be easier.

Don’t worry, we will not talk about the business side of the sunk cost, but it is also important to know what it means so that we can have an overview of the fallacy that we will take a look at.

What is Sunk Cost Fallacy?

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Sunk cost fallacy is the tendency of a person to continue committing to something they already invested their time, energy, effort, and money in — even if the activity is already counterproductive or when there are better alternatives.

The sunk cost fallacy will often bring problems with our decision-making because if we’re honest with ourselves, we don’t want to waste our resources, particularly our time and money.

For instance, look at your closet. How many pants, shirts, skirts, jackets, and other pieces of clothing do you store and don’t want to dispose of because you are always thinking about the cost of the purchase?

Similar to the previous examples in the introduction, the sunk cost fallacy happens daily. It may be as simple as finishing a book we don’t like or continuously watching a movie that doesn’t make sense.

Then there are also bigger issues that sometimes would be better to give up on, and continuously investing more time, energy, effort, and money into an endeavor may not be the best long-term decision.

Sometimes, Quitting and Giving Up Is the Best Thing To Do.

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We often hear the quote that quitters are losers, but is it really true?

What if I tell you that quitting may sometimes be the best thing that you’ll do when the other options are counterproductive, unhealthy, or maybe even toxic?

I remember in 2019 when me and my two best friends had a vacation plan and we already booked our tickets. However, there were unexpected events that caused them to back out, leaving me with decision to proceed or not.

Considering the total expenses I will incur by going on the vacation alone while I was unemployed, I decided to not proceed and counted the airfare a sunk cost.

Sunk Cost Fallacy and Education

In another example, a 3rd-year student studying for a degree chosen for you. However, he didn’t like it, and he was becoming miserable. Yet he pushed through because he didn’t want to waste the last three years of his life.

What do you think will then happen?

Then he will work on a related job to his degree because you have already invested time, energy, and effort. Then, he would continue working on that job he hated for the next 30 or 40 years because he didn’t want to waste the four years of his college education.

It’s important to remember that there are other instances when quitting may be the best viable solution for your situation, like in education, careers, and finances.

Sometimes, we need to quit before we can change our path to a better destination.

Sunk Cost Fallacy and Personal Finance

A common occurrence of the sunk cost fallacy that I noticed is in the area of personal finance, particularly in investments.

We usually hold on to our investments and even double down on them because we don’t want to acknowledge that we were wrong, so we avoid cutting our losses. Which, in turn, causes more losses.

Sunk cost fallacy may also apply to an unprofitable business venture, a long-term downtrend stock, an unproductive real estate investment, a VUL, and many more.

For instance, a stock trader is already down 50% on a “basura” stock. However, they don’t want to acknowledge they are wrong, so they will hold on to the position.

This action would be their response even if selling the stock and buying a better position or saving their capital would have been a better option.

So, if we’re given a chance to cut our losses earlier, it may soon prove to be a more profitable move.

How to Avoid The Sunk Cost Fallacy Trap?

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Avoiding the sunk cost fallacy trap is difficult because it will take a toll on our psychology, especially our emotional attachments to the things we have already spent our resources on.

So when deciding on something, we need to remember that the things we put into a venture are already gone and will not be recovered, and chasing after it may not be the best idea.

So by “giving up” on some things, we can refocus our energy and resources on other future endeavors that will be more favorable to us.

Similar to the scarcity principle in Economics, our resources are limited while the demand for us may be higher. So, we need to reallocate them properly.

Final Thought

The sunk cost fallacy is a great principle we must learn to maximize our resources and minimize our losses.

We can only spend our time, money, energy, and effort on a few things at a time, so we need to make it count.

It may not feel great at first, but once we learn to let go and prioritize, we will have more options to choose from in the future.

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