Why good people make bad decisions: The sunk cost fallacy

How many people do you know who are stuck? In their jobs, in their relationships, in their houses or towns or professions or life choices? How did they end up there? One way or another, they have all made decisions – actively or passively – that have lead them down a path they’re not 100% happy with, and they’re afraid it’s too late to turn back. Whether they know it or not, the “sunk cost fallacy” is probably partly to blame.

I recently met a woman who had a real passion for medicine. She read detailed surgical reports, knew all about the latest in cancer research, and felt at home talking to a room full of doctors. She told me, wistfully, “I wish I had gone to medical school.” Instead, she had done a degree in Business Administration and was working as an Assistant Manager at a car manufacturing plant. I don’t know which decisions led her there, but at 27 there she was.

It doesn’t matter if you’re 17 or 27 or 37, I told her. Study medicine (by the way, she lives in Germany where med school is free). Go back to school. You get one shot at this life. Yes, med school takes a really long time. But you’re going to get older anyway (if you’re lucky). It’s up to you if your LinkedIn profile says “Physician” or “Plant Manager” in 10 years. It’s up to you to dispose of the mindset that says: “This doesn’t feel right, but I’ve already invested so much into it. I may as well continue.”

We care so much about what others think of us. We don’t want our parents or friends or professional network to think we’re flaky, so we stick with things that don’t sit right.

A friend of mine had been married for 3 years when she told me she wasn’t happy. They got married too young; they wanted different things from life. She told me all of this in a whisper.

“You’re the only one I can talk to about this,” she said. “My other friends would kill me if they knew I wanted to leave him.”

Who was unhappy in that relationship – she or her friends? Why does it matter if her friends approve of her decisions or not? If they’re true friends, they’ll get past their disapproval. We get so bogged down in what other people think of us, we forget to listen to the voice of the person who’s been there all along.

Why does this happen?

We all fall victim to a vicious cognitive trap that transcends class, gender, race, education level, and experience: the sunk cost fallacy. In short,

There is a “greater tendency to continue an endeavor once an investment in money, effort, or time has been made. The prior investment [motivates] the present decision to continue… despite the fact that it objectively should not influence the decision.” (Arkes & Blumer, 1985)

This irrational behavior is driven by one debilitating psychological justification: the desire not to appear wasteful. This desire – to come across as if our past or current investments are wise – leads us to make foolish future investments. Imagine this:

You’ve just spent $100 on ticket for a weekend ski trip to Michigan. A few weeks later you buy a $50 ticket for a weekend ski trip to Wisconsin. You think you will enjoy the Wisconsin ski trip more. As you put your just-purchased ticket in your wallet, you notice that the Michigan ski trip is on the same weekend! It’s too late to sell either ticket and you cannot return either one. Which ski trip do you go on?

In a 1985 experiment conducted by Arkes and Blumer, a majority of the subjects chose the Michigan trip — despite knowing they were expecting to enjoy the Wisconsin trip more. This is contrary to traditional economic theory, which predicts that 100% of the subjects would choose the Wisconsin trip based on projected costs and benefits.

Why does it matter?

The sunk cost fallacy is harmful because it prevents us from realizing that the best choice is to do whatever promises the better experience in the future – not whatever negates the feeling of loss in the past.

The sunk cost fallacy is what makes us continue eating the food that tastes a bit off. Or what makes us stay in relationships that we know, deep down, aren’t right, or what makes us stay in a job we don’t like. It’s what makes business continue with unsatisfactory suppliers and mediocre employees whose performances are affecting the bottom line. It’s what makes us pour thousands of dollars into a car that would only resell for hundreds. It’s used by those who would like to push their agendas – and who know that discarding investments makes us queasy. At its worst, it’s what keeps failed policies alive and drives wars.

Avoiding the sunk cost fallacy is hard. It takes refusing to place too much emphasis on what others think of you. It takes the ability to evaluate current decisions as if you were just dropped into your life in that instant. It takes facing the uncertain. It takes risk.

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