The Sunk Cost Bias Mind Trap

by Stephen Mills on March 16, 2010

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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.

What do YOU think?  Leave a comment and join the conversation.

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{ 4 trackbacks }

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{ 25 comments… read them below or add one }

Eduard @ People Skills Decoded March 16, 2010 at 9:08 am

Hey Stephen,

This is an interesting phenomena. I often say that the definition of wisdom is to put you ego aside and make the decisions which are rational in terms of costs and benefits. Seems to me that understanding sunken costs can help a lot here.
.-= Eduard @ People Skills Decoded´s last blog ..The smart things to do for charity =-.

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Stephen Mills March 17, 2010 at 3:34 pm

Hello Eduard, sunk cost bias is at the root of a lot of our irrational decisions.

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Valerie M March 16, 2010 at 10:21 am

Yep, you’re talking about a real problem here. I get that all the time when I change my mind in the middle of a project and I get objections from other people: “You’re almost there/done… why not just suck it up and finish it?” And I admit there are times I allow myself to get guilted into finishing something I do not care about.

This is a huge problem with the government, by the way, which is why I have a big problem with these huge undertakings by this administration. The intentions may be great, but if it doesn’t work, we’ll be stuck because the rationale is that we’ve invested so much money/time/effort into it, we can’t quit now even if it’s bankrupting us (*ahem* Medicare). Not to mention the outrage it would cause if we were to take back an entitlement.

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Stephen Mills March 17, 2010 at 3:36 pm

Hi there Valerie. On your government comment I’m going to agree. It seems to me that large organizations in general (e.g. corporations, government) have a problem ending something once the momentum of bureaucracy gets rolling.

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Sid Savara March 16, 2010 at 1:32 pm

Hey Stephen,

Oh man do I know the sunk cost fallacy! I come across it all the time, but it is still tough for me to rationally act the way I know I should sometimes

“Do not cling to your past actions. As hard as it is to do, make your decisions based upon what is before you”

I remember reading a study once where some school had a limited amount of tickets to a sporting event (I think football) and so all the students put their names in a lottery, and the ones that won had a chance to buy tickets. As expected, everyone bought the tickets, and it sold out

Now whats interesting is they then went and surveyed the people and asked them how much the tickets were worth, and how much the non-winners were willing to pay to buy them secondhand – and how much the winners would be willing to accept for them. Almost universally, the winners wanted 2-3 times as much as the non-winners said the tickets were worth. The researchers propose this is because once we have something, and it’s “ours” we value it much more

=)
.-= Sid Savara´s last blog ..Conversation Hacking – How To Make Small Talk Work For You =-.

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Stephen Mills March 17, 2010 at 3:52 pm

Hi Sid, I’ve read similar types of studies around valuing what we already have. I think that certainly plays into sunk costs. Thanks for stopping by to comment.

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Jonathan - Advanced Life Skills March 16, 2010 at 8:13 pm

Stephen, there is pain attached to this lesson and you just hit the button. I once chased six figures into the sunk cost category in the stock market. Why? I guess because I needed to learn this lesson the hard way. This is going to hit home with a lot of people. What a great reminder for some and a total Ah-ha for others. Thanks for the pain review.
.-= Jonathan – Advanced Life Skills´s last blog ..Confidence and the Courage to Take Action =-.

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Stephen Mills March 17, 2010 at 3:53 pm

Hello Jonathan, sorry to remind you of a painful experience 🙁

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Jonathan - Advanced Life Skills March 17, 2010 at 7:21 pm

That’s okay brother, a little reminder now and then helps keep those valuable lessons we’ve learned alive. That means we won’t need to go there again. Some of the most important lessons in life come with a big price tag attached.
.-= Jonathan – Advanced Life Skills´s last blog ..Confidence and the Courage to Take Action =-.

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Sami Paju March 17, 2010 at 7:28 am

Very interesting post! During the past weeks I’ve started to notice that I’m getting less and less value from the blogs I follow. Not that they aren’t good reading, but because I’ve grown as a person and acquired more knowledge myself so it’s rare to read something that really surprises me and makes me think.

You achieved that with this post. Great work! 🙂

//sami
.-= Sami Paju´s last blog ..Diet, cholesterol, and heart disease =-.

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Stephen Mills March 17, 2010 at 3:53 pm

Hello Sami, that is a very nice compliment and I very much appreciate it. Thanks for stopping to comment 🙂

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Mike Dooley March 17, 2010 at 8:06 am

Stephen,

This is an amazing point. In my studies, I typically come upon this phenomenon in the form of what is known as the Consistency Principle. It is the tendency for people to need to follow through on their actions. It is why telling people your New Year’s Resolution makes you must more likely to follow through with it. Marketers and users of social persuasion typically use this principle to hook their customers. Because it is such a natural human instinct, it is so difficult to pull away, but I think you do a great job of putting it in terms so that people feel they can. Great job. Keep writing!

MikeDooley

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Stephen Mills March 17, 2010 at 3:55 pm

Thank you Mike! These are the kinds of comments that make taking the time to share my thoughts worth it 🙂

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Sandra Sins-Martin March 17, 2010 at 8:28 pm

Never knew that cycle had a name. “Sunk” is perfect, rhymes with skunk and that means something smells. Now I’ll be able to fight the inclination by just thinking “sunk”. Thanks

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Stephen Mills March 18, 2010 at 6:37 am

Sandra, thank you for commenting. I’m glad you have a name for it now 🙂

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Chetan Crasta March 18, 2010 at 3:25 am

Great post!
I wonder what thought process leads to this cognitive bias.

Taking the $150 theater ticket example, since at the time of buying the ticket I thought it was worth the $150 and the time taken to watch it, unless some new information is available to me or some new analysis, I would attend the show.

Also, by not attending the show I risk missing out on something important, the value of which cannot be ascertained. However, I know exactly what I am going to lose by attending the show (the time). So, fear of the unknown might also have something to do with it.

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Stephen Mills March 18, 2010 at 6:36 am

Hi Chetan, thanks! In the ticket example you bring up there is some new information. At the time you bought them you thought you would want to go, but when the day rolls around you would rather do something else. We humans are terrible at predicting future conditions.

Don’t get me wrong, you should go through an analysis like you describe except you shouldn’t consider the fact that you spent $150. Experiments show that if you were prepared to spend $150 and at the last second you were offered them at $75, you would be less likely to go. You would have less invested in them. However, rationally, the value of the show to you would not have changed simply because you got the tickets at a lower cost.

So when I make decisions like this I try to consider all factors like experiencing something new, social factors, whatever I now know. Whatever costs I have sunk into it in the past are irrelevant to whether it is still a good decision.

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Chetan Crasta March 18, 2010 at 7:46 am

I agree. Ideally, we should always re-evaluate important past decisions when the time comes to act. However, I often fail to do this because of the mental effort involved. It is easier for me to think “I spent $150, therefore, at the time I thought it was a good idea. It probably still is a good idea.”
This kind of thinking probably has an evolutionary advantage — if we constantly rethought every decision, we’d probably get very little done!
I guess the Holy Grail is knowing when to reevaluate something and when to “go with the flow”.
.-= Chetan Crasta´s last blog ..The Background Properties =-.

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Mike King March 19, 2010 at 9:11 pm

Excellent point here Stephen and great real examples. I’ve certainly had similar experiences with feeling like I have to finish something. Decisions on loss are almost always more emotional than the same potential equation than a gain. Studies support this phenomenon that most people would spend more money protecting the loss of something (sunk costs) than they would taking on an equal risk to gain the same amount. No sunk costs when looking to gain so no emotional connection. Its odd human behavior for sure and explains a lot of actions where people dig themselves deeper and deeper.
.-= Mike King´s last blog ..9 Tips on Handling and Eliminating Negative Stress =-.

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Dragos Roua March 22, 2010 at 1:32 am

Thanks for the article, Stephen, it’s timely for me. I think I tend to see things too often through the lenses of “profit”: financial profit, emotional profit, life profit. That makes for a pretty tight observations of spending as you named it (if we take it that profit is what remains after you take out what you’ve spent from what you received). But this is not always the case. I mean, sometimes things are just not going on as we think they would. And we paid that money or invested those emotions. And I’m grateful for your take: just move on. Paper loss. Baloney.

Life’s ahead. Always. 🙂
.-= Dragos Roua´s last blog ..33 Ways To Overcome Frustration =-.

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Ben10 November 22, 2011 at 4:35 pm

cool article thanks dostlar

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asad gujjar January 12, 2012 at 12:49 pm

it is really a good article thanks.gujjar

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Ziozzi September 25, 2012 at 8:26 am

What a bunch of bull. You cannot take business oriented rules and apply them to your personal life like that.
You spent 150$ on a ticket. You don’t feel like going, you still should go. Lesson: next time get expensive tickets only to something that you really like.
You spent 2 hours out of 5 trying to accomplish something. Now you don’t care anymore. Finish it. Lesson: next time, don’t start what you can’t finish or start something you really care for.
Otherwise you’ll just become a loser. Throwing money away, dropping every task at the minimum discomfort, always looking for the next thrill, not caring for whatever you did with your life, just with what you want to do in the next couple of hours.

“Yeah, I spent half my life with my wife, next week I want to be with my friends, I should drop her…”

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