Sunk cost bias is one of the most common and difficult to avoid mind traps. Sunk costs are costs that have already been incurred and cannot be recovered. They can be in the form of money, time, or even emotions and stress.
You’ve spent two hours on a task and you have three hours remaining to finish it. You’ve invested $1,000 in a stock that is now worth $750. You’ve spent $10 on a movie ticket and you’ve watched the first 15 minutes and you hate it. You’ve spent $150 on theater tickets and tonight is the night of the show. You’ve “invested” a year in a relationship and you now have serious doubts about his commitment. You’ve spent five years at your current job.
These are all examples of sunk costs. You can’t get them back. The mind trap occurs when you irrationally consider those sunk costs when making decisions about the future. In these examples and innumerable others, the only important factors are those that lie in the future, and not what you’ve done in the past. Despite being fully aware of this trap, I still have a difficult time avoiding it myself sometimes.
It doesn’t matter that you’ve already invested two hours in your task. Whether you finish it or not, you will still have spent that two hours. They are gone, sunk. It doesn’t matter that you spent $150 on theater tickets. Whether you go or not you’ve already spent the money. It is gone. The question now is whether you want to go to the theater for free or just chill out at home. You would be in the same position if you had lost $150 in cash and someone had given you the tickets for free.
It doesn’t matter that you invested $1,000 in stocks that are now worth $750. The only question now is what is the best investment you can make with your $750. You shouldn’t hold on to that particular stock so you can avoid selling at a loss if there is a better investment. My wife says it is only a “paper loss”. Baloney.
In the case of the task, the fact that you invested two hours is irrelevant to what you should do with the three hours remaining. You shouldn’t “hold onto” that task either. You should invest your time in the most valuable activity you have available to you. The fact that you spent $10 on a movie and time travelling to the theater and so on, is irrelevant to whether you should spend an additional two hours watching a movie you hate. You’ve already wasted time and money so you shouldn’t compound the problem wasting more time. Don’t throw your valuable resources down a hole just because you dug one.
You should be looking forward and making your decisions based upon what is before you and not what is behind you. Do you want to spend two hours watching a bad movie? Do you want to take your free show tickets that you already have and go to a show or do you want to stay home or do something else? You need to decide how you should you spend the time and money that you have now and not the time and the money you had yesterday.
Go back to the theater tickets which I admit is a really hard one. You are emotionally invested in that $150 you spent on them and you are very unlikely to let it go to “waste” just because you don’t feel like going when the day of the show rolls around. You would just rather stay home but since you spent $150 on the tickets you have to go right? No, your decision at this point is would you rather go to see a “free” show (you already have the tickets) or would you rather stay home and chill. That is very hard to do and very few people would choose to stay home, but it’s the rational way to make the decision.
Just the other day a friend of mine offered me free tickets to a show. They were VIP tickets but I declined. I just didn’t feel like going that night. However, I can almost guarantee you that if I had paid for those same tickets I would have went. I would not have so casually decided I would just rather stay home. Sometimes we just can’t help our irrational selves
Do not cling to your past actions. As hard as it is to do, make your decisions based upon what is before you. Make the most of your present life by living for what you have now.
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