Have you ever started reading a book and decided it was terrible, only to keep reading it anyway? If so, you’ve fallen victim to economists’ biggest pet peeve: the Sunk Cost Fallacy.
The Sunk Cost Fallacy describes our tendency to continue in an endeavor as a result of past investments in it. Sunk costs are any costs – like time, energy, or money – we’ve invested in the past that we can’t get back. Because there’s nothing we can do about them, the rational thing to do is ignore sunk costs when deciding how to invest our future time, energy, and money.
In reality, we feel compelled to press on in order to make those previous investments “worth it”. We continue to pour more money, time, and energy into the commitments we’ve started even when our limited resources would provide better returns elsewhere. To make matters worse, society tells us the Sunk Cost Fallacy is a virtue. We’re told that quitters never win. We’re told we need grit and resilience. We equate walking away with failure when it can actually be the most logical course of action.
The Sunk Cost Fallacy keeps us from spending our time well in ways big and small, from trudging through a bad book just because we started it to continuing in a career that makes us miserable because we’ve already invested years of our lives and thousands of dollars on a degree. The fact that you’ve invested one year or two years or even ten years of misery and discontent into a career is not a good reason to continue being miserable for the next three decades. And yet, that’s exactly what the Sunk Cost Fallacy leads us to do.
What you can do about it:
Make opportunity costs explicit. Every decision has two costs. The first is the actual amount of money, time, or energy you invest. The second cost is the benefit you would have gotten from the next best alternative. This hidden price is called the opportunity cost and we’re much more likely to ignore it when we make our decisions. For example, when considering a career change, we tend to focus on the money we’d be giving up. We fail to take into consideration the joy and satisfaction we’re currently missing out on by staying. The first step to counteracting the Sunk Cost Fallacy is making clear what alternative we’re giving up by continuing to invest more time, energy, and money into what we’ve already started.
Do a quarterly inventory of your commitments. We often fail to adjust course because we never reach a crossroads where we have to decide whether to keep going or walk away. You need to create your own decision moments where you take a step back and decide if continuing a goal or commitment makes sense. Set a specific timeline to periodically map out the big picture of where your time is going and where you want it to go. To make the opportunity costs explicit, visualize your time as a pie graph so that you can’t add anything without taking away from something else.
Ask yourself “If I were just starting this endeavor today, would I still do it?”. If the answer is no, then the logical thing to do is cut your losses and walk away. Sometimes, quitters win.