Knowing When to Stop: Sunk Cost Fallacy
“Half of the troubles of this life can be traced to saying yes too quickly and not saying no soon enough.”
-Josh Billings
I have made many mistakes in my life. Failing responsibly is good, because it means you are putting an effort to learn and grow. As long as you learn something from your mistakes you hopefully won’t make the same ones again. Although not repeating ones previous mistakes can sometimes be hard as well 🤦🏻
Sometimes I have made mistakes for too long before realizing it was a mistake or even not realizing it at all until years later. When I first read the book Essentialism by Greg McKeown I became aware of a bias called Sunken Cost Fallacy or Sunk-cost bias.
“Sunk-cost bias is the tendency to continue to invest time, money, or energy into something we know is a losing proposition simply because we have already incurred, or sunk, a cost that cannot be recouped.”
-Greg McKeown - Essentilism
Here are some ways I have fallen for sunk-cost bias:
🙋🏻 Have you ever been super full at a restaurant but still forcing yourself to finish just because you have paid for it? I do it all the time.
🙋🏻 Another clear example for me is falling in love with a certain stock on the market. And then sticking with it for too long even if there were clear red flags and I should have sold a long time ago.
🙋🏻 Another one is reading a book I realize I don’t enjoy and then suffering through it for a long time. Instead of just stopping and picking up an enjoyable book.
🙋🏻 Have you ever been committed to a work product or project that is clearly no longer the best use of resources? But it keeps going since so much time and money has been invested in it already.
🙋🏻 If you have paid to watch a movie, who walks out halfway if it is bad? I don’t.
It is natural to struggle with letting go of something we’ve invested in or feel ownership of, even if it was a bad choice. But if we don’t we are just wasting even more.
I want to be comfortable letting go, pulling the plug, uncommitting, cutting the losses, admitting failure and moving on. It is by no means easy but here are some of the techniques I use to avoid or get out of sunk-cost bias:
✅ Awareness. Being aware of the sunk-cost bias. After reading about this bias it has been much easier for me to recognize situations where this applies to me.
✅ Admitting failure. This takes practice but what you practice on you get better at 😯💪🏻 It was hard admitting that the stock I had invested in for years was a failure. But oh did it feel good when I finally let go, making it a thing of the past.
✅ Second opinion. Get a second opinion from someone neutral. Get the opinion of someone who is not biased towards what you struggle with. Call a friend, family member or colleague and they might just help you think straight.
✅ Question yourself. Actively work with yourself to avoid status-quo bias. “It has always been like that”. Question the thing you are stuggling with and ask yourself why? Why is it so hard to put down the boring book and pick up a new one? Use the 5-whys technique if needed. This can help you break out of habitual thinking.
✅ Reflection. Reflect back on past times when you have fallen into sunk-cost bias. If you have been documenting past decisions and thoughts you might learn a lot and better understand why you fell into it in the first place. By documenting your decisions and thoughts you can also more easily avoid hindsight bias. Read my post about “Why I write?”.
✅ Goals. Set clear goals. If you have set a goal to save x amount of money in 5 years but your savings and investments are stagnating or falling it might be easier to cut the losses and move on.
✅ Reset. Pretend to hit the reset button. If you hadn’t started the book yet would you now? If you didn’t have any shares in the company what would you pay for one today?
For me, being aware of biases like sunk cost fallacy has definetly helped me making better desicions and especially avoiding or getting out of bad ones. However it takes time and practise and scheduling time for reflection is key.