Imagine you and your significant other go on a date to a movie. Ten mintutes in, you realize the movie is horrible. Your surreptitiously check reviews on your phone and confirm it doesn’t get better – it’s just a horrible movie. What do you do? You’ve paid $30 for the tickets – you feel as if leaving will be a waste of $30.
This is a classic example of the sunk cost fallacy which is the tendency to allow past unrecoverable expenses (time, money, or energy) to inform current decisions.
In the movie example you have two primary choices:
- Suffer through the movie and have a bad experience having already spent $30 OR
- Leave the movie and have a better experience having already spent $30
In both set of choices the $30 is already spent – it’s gone.
The sunk cost fallacy is applicable in many situations in our personal lives and at work.
- It is common in relationships – ” I don’t want to breakup with my girlfriend because it will mean I’ve wasted the past 2 years of my life.”
- In business – “we’ve invested so much time, effort and money in our employee Kiefer that we are not going to get rid of him even though he is a low performer.”
- In personal finances – “I put $10,000 into that Kodak stock, I don’t want to sell it at $5,000.” (Try asking yourself – if I was starting with cash, would I buy Kodak – it helps make the right answer clearer.)
- With experiences – “My rental ski boots really hurt, I have an altitude headache and the snow conditions suck but I’m going to keep skiing because I spent $150 on my lift ticket.”
The first step in overcoming the sunk cost fallacy is to recognize when you have a sunk cost and mentally set aside that money. Realize it is gone. Make your prospective decision without considering the sunk costs.