My knowledge of economics is pretty sketchy, but sometimes it gives me good ideas that I can adapt for myself. For instance, I recently learned of an economic principle called the “sunk cost fallacy”. The sunk cost fallacy is the tendency to continue doing something for fear that by stopping, you’ll lose what you’ve already put into it.
For instance, I planned a recent trip that included a Rockies game, and was really looking forward to it. But, the reality of how far I would have to travel to the stadium only hit me when I actually arrived in Colorado. Then, Mother Nature made things worse by turning cold. Finally, it started to rain heavily.
So, I was stuck in a campground, far from Denver, wondering if I should go to the game anyway. Normally I would really enjoy a game, but this time it would mean driving to the stadium in a downpour and being rained on through the entire game, then driving a long way back in the dark and on wet roads.
Doesn’t sound like much fun, does it? Yet, there was one reason I might have still gone to the game, and that was because the ticket money would have been a total loss if I didn’t.
This is when I was dangerously close to the sunk cost fallacy. If I’d fallen into it, I would have gone to the game – giving up a whole evening for bad weather and losing money already beyond recovery. If I was thinking only about lost money, this is what I would have done.
Yet, I had an alternative. I decided to accept that the money was gone and have fun doing something else. Of course, losing money was regrettable (and avoidable with better planning), but in reality, even though I badly wanted to have fun watching baseball, that just wasn’t going to happen. I wasn’t going to get that any more than I was going to get my money back.
Sometimes you just have to cut your losses because continuing down the same road only leads to losing more. Yet, the choice can be hard. When you’re emotionally invested – or you’ve been hoping for a great outcome – it’s only natural that you don’t want to believe that your plans and dreams aren’t going to work out.
Consider these situations:
- Andrea has been dating Steve for five years. She stays with him because she wants to get married, but he isn’t proposing.
- He dreamed of being a teacher since he was 12, so Sam worked to put himself through college and got a job in a good school. Then, he found out that he actually hates teaching.
- Because her parents were divorced, Jane badly wants her marriage to last. But, her husband is violent, drinks too much and doesn’t change, like he promises to.
Each of these people could fall into the sunk cost fallacy:
- Andrea might decide to wait until Steve turns 30, expecting that he’ll want to settle down by then. Another option would be for her to find a man whose goals are more in line with hers.
- Sam could convince himself that he will grow to like teaching in the future, rather than taking his savings and start his own business (despite this being his secret fantasy).
- Believing that her husband might be inspired to change, Jane could show more affection. Or, she could leave until he stops drinking and goes to an anger management course.
Ask yourself if your relationship or your job – or anything else you think is important – has absorbed years of time without getting you to your goal, does it make sense for you to continue investing in it? Why might or might you not want to do that?
Check back soon and we’ll explore some ideas about how you can avoid being snared by the sunk cost fallacy.