How Does the Sunk Cost Fallacy Affect Our Decision Making?

In Rationality, cognitive neuroscientist and author Steven Pinker writes: “One of the most commonly cited human irrationalities is the sunk-cost fallacy, in which people continue to invest in a losing venture because of what they have invested so far rather than in anticipation of what they will gain going forward.”

Ever found yourself sticking with a book that’s utterly boring, simply because you’ve read half of it? Or maybe you held onto a dress you never wore, thinking of the money you spent on it? Well, welcome to the world of the sunk cost fallacy! This common hiccup in our decision-making process is worth exploring further. Today, let’s dive into how sunk cost fallacy impacts our choices in life and in our alcohol cutback or quitting journey. 

From Economic Roots to Psychological Insights

The concept of sunk costs originated in the realm of economic theory. Economists recognized that rational decision-making should not consider "sunk" investments — costs that are a done deal and cannot be recovered. In an ideal economic world, only future costs and benefits should impact choices.

However, as behavioral economics — a field that combines psychology with economics — began to emerge, researchers noticed that in daily life, people often didn't act rationally (at least in the economic sense). We have a knack for letting past “investments” — financial or otherwise — influence our current decisions.

The 1970s and 1980s were a prime era for understanding this behavior. Psychologists Daniel Kahneman and Amos Tversky documented numerous cognitive biases humans have, including the tendency to overvalue sunk costs. They found that emotions, societal pressures, and cognitive biases (such as the sunk cost fallacy) influence many of our decisions.

One of the most cited cases is the Concorde airplane developed by Britain and France. Despite growing evidence during development that it wouldn’t be economically viable, governments kept funding it to justify the initial investment. In fact, the "Concorde Fallacy" has since become another name for the sunk cost fallacy in some circles!

In the following decades, psychologists continued to explore the sunk cost fallacy in different contexts. In one 1985 experiment by Hal Arkes and Catherine Blumer, researchers asked participants to imagine they paid 100 dollars for a ski trip to Michigan. Next, they asked the subjects to imagine they came across a better trip to Wisconsin for half the price and bought the tickets for that one as well. When asked what they would do if the two trips overlapped, most said they would pick the Michigan trip simply because of the larger financial investment — in spite of the fact that doing so would result in a sub-par skiing experience (as per the conditions of the experiment).

The Sunk Cost Fallacy Today (and the FarmVille Fiasco)

Today, the concept of the sunk cost fallacy is widely recognized both inside and outside academia. It now refers to our overall tendency to follow through on an endeavor if we've invested time, money, or energy into it, even if it's no longer the best choice. The more we invest, the harder it becomes to walk away, even if logic tells us otherwise.

An interesting modern-day example came up on an episode of the You Are Not So Smart podcast back in 2011. The episode focused on the sunk cost fallacy and the ridiculous lengths we tend to go to in order to “protect” our investments by using the example of FarmVille — the virtual farming game that once ruled social media feeds and prompted many of us to tend to virtual crops and livestock. Beyond the pixelated vegetables and the cheerful background music, FarmVille offers a fantastic example of the sunk cost fallacy in action.

At its core, FarmVille was a resource management game. Players planted crops, raised animals, and built structures on their farm. As they made progress, the game introduced longer-term crops and tasks that demanded more time and attention. As players invested more time and, in some cases, actual money (through in-game purchases) into their farms, they established a commitment to their virtual land.

Granted, the game was fun — at least at the beginning. However, as time went on, players felt more and more committed to their virtual property, at the expense of real-life engagements. Some even put their jobs in jeopardy for the sake of virtual livestock and landscaping. Why? It all comes back to the sunk cost fallacy. Over time, even if the game became monotonous or time-consuming, players found it hard to walk away because they've invested so much time and resources into their “farm.” They didn’t want to feel like all their past efforts were "wasted" by abandoning the game.

As we can see, understanding the grip of sunk costs has profound implications — whether we’re talking about businesses taking a hard look at unproductive projects or people reassessing personal choices. As we move forward, being aware of this fallacy's historical roots and our susceptibility to it allows us to make better, more informed decisions.

The Brain’s Take on Sunk Cost

Our brains play an important role in cognitive biases — and the sunk cost fallacy is no exception. As humans, we're naturally loss-averse. We feel the pain of loss more deeply than the joy of gains. So when we face the idea of "wasting" resources, our brain goes, “Oh no! Not on my watch!” Let’s take a closer look at the four areas of the brain involved in the sunk cost fallacy:

• The emotional seat: the anterior insular cortex. It's not just your imagination — holding onto a poor investment indeed feels painful. The anterior insular cortex, an area of the brain involved in processing emotions like pain and disgust, activates when we're faced with potential losses. This region effectively puts a neural spotlight on the discomfort of loss, making us more averse to letting go of an investment, even when it's not serving us well.
• The battle of logic vs. emotion: the prefrontal cortex. Responsible for rational decision-making, this area tries to evaluate the pros and cons logically. When we’re contemplating giving up something we’ve invested in, our prefrontal cortex is the one urging us to consider future benefits and potential outcomes. But it's not all-powerful. In many situations, our emotional responses can overwhelm these logical processes, making us more prone to the sway of the sunk cost fallacy. Letting go feels like admitting failure. And who likes that, right? Recognizing a bad investment, whether in time, money, or emotions, can hurt our ego. We'd rather keep going, hoping things might turn around, than accept the sunk cost.
• The reward center: the striatum. The striatum is the brain’s reward hub that lights up when we expect something pleasurable. Curiously, it's also activated by the prospect of avoiding loss. So, when we’re  weighing the pain of abandoning a project or relationship in which we’ve invested heavily against the “reward” of sticking with it and potentially seeing a return on that investment, the striatum is a key player.
• Memories and learning: the hippocampus. Our past experiences play a role in shaping our current decisions, and the hippocampus is central to this. It's involved in forming and recalling memories. If in the past we regretted letting go of something we invested in (even if it was the right choice), the memory of that regret could make us more hesitant to "give up" in the future.

In this way, the brain’s wiring can predispose us to falling into the sunk cost fallacy. However, simply being aware of these natural tendencies is a huge step in avoiding the mental trap!

The Many Faces of the Sunk Cost Fallacy

The sunk cost fallacy isn't a one-trick pony — it pops up in various aspects of our lives. Let’s journey through the 7 different contexts where this cognitive misstep can emerge.

1. Personal Relationships

Relationships are built over time, marked by shared memories, emotional investments, and sometimes challenges overcome together.

Example: Consider Jake, who's been in a tumultuous relationship for five years. Even though he's unhappy, he thinks about the time and emotional investment he's put into the relationship and decides to stick around, hoping things will improve, instead of considering if this relationship is beneficial for his future.

2. Business Investments

Business decisions often involve monetary and time investments. The initial excitement of a project can sometimes blind us to when it's time to redirect efforts.

Example: Sarah's company launched a product that hasn't been performing well for years. Instead of cutting her losses and focusing on other promising products, she continues to pump money into marketing and development, swayed by the initial investment her company made.

3. Education and Career

Education and career paths are significant commitments, often seen as defining aspects of our identity and life trajectory. It can be difficult to let go of the enormous investments of time and money when it comes to considering if we should change tracks.

Example: Liam spent two years in a graduate program before realizing he’s not passionate about the field. However, instead of switching paths, he completes the program because he believes the time and tuition spent would be "wasted" otherwise.

4. Entertainment and Leisure

Leisure activities, from concerts to vacations, involve both financial costs and the anticipation of enjoyment that can trigger the sunk cost fallacy when we’re considering a change.

Example: Maria purchases a ticket for a music festival. On the day, it's pouring rain, and she’s not feeling well. Rather than staying home, she goes because she believes not attending would mean “wasting” the ticket cost.

5. Personal Projects and Hobbies

We often explore hobbies hoping to find passion, relaxation, or a new skill. The initial investment can sometimes become a tether.

Example: Alex started learning the guitar. After purchasing an expensive one and spending months on lessons, he realizes he doesn’t enjoy playing. But the thought of the money spent keeps him reluctantly strumming, instead of exploring other hobbies he might genuinely love.

6. Political and Societal Decisions

On a larger scale, societal projects, from infrastructure to policies, often involve vast resources and have lasting impacts on communities.

Example: A city has been constructing a new transportation system. Halfway through, new technology emerges that would be cheaper and more effective. Instead of adapting, the city continues with the outdated plan, swayed by the already spent funds and efforts.

7. Health and Wellness

Health decisions, from diet choices to fitness commitments, greatly influence our well-being. Yet, past investments can sometimes overshadow what's best for us.

Example: Jenna joins an upscale gym with a hefty membership fee. A few months in, she finds she prefers outdoor workouts. Despite this, she forces herself to the gym, influenced by the sunk cost of the membership, rather than pursuing workouts she truly enjoys.

The Sunk Cost Fallacy and the Alcohol Journey

Finally, let’s consider how the sunk cost fallacy can show up on our journey to cut back on or quit alcohol. Navigating our relationship with alcohol can be a winding road, with each bend and curve shaped by societal influences, personal experiences, and yes, cognitive biases like the sunk cost fallacy. Let's explore how this mental trap can influence our choices:

• The investment in drinking culture. For many, drinking isn't just about the alcohol; it's about the memories made, friendships solidified, and bonds created over a pint or a glass of wine. We invest in the culture — the late nights, the parties, the "just one drink after work." Over time, this investment becomes not just monetary but emotional and social.
• The formation of our identity. Imagine you’ve been drinking socially for years. It's become part of your identity. You have a collection of expensive wines, memories of pub crawls, and countless tales of boozy adventures. You've invested. Now, let's say you're considering reducing your alcohol consumption or quitting altogether for health or personal reasons. The sunk cost fallacy kicks in, reminding you of all those investments. Thoughts like, "But I've spent so much on building my wine collection!" or "What about all those memories?" can make the decision to cut back much harder.

While the past plays a vital role in shaping us, our future decisions about alcohol should focus on what's beneficial moving forward. This might mean:

• Recognizing that the money spent on alcohol is a sunk cost, and prioritizing future savings and health benefits.
• Understanding that memories made while drinking don't lose their value if you decide to drink less or abstain. They're a part of your story, but they don’t have to dictate future chapters.
• Forgiving ourselves for making decisions that no longer align with our life path, goals, and new identity.
• Embracing new, alcohol-free experiences and memories, and appreciating the clarity and wellness that can come with them.

Tackling the sunk cost fallacy on our alcohol journey means taking a step back, evaluating our current relationship with alcohol, and making choices that align with our future well-being, rather than being anchored to past investments. It's a journey of self-awareness, growth, and empowerment.

Navigating the Sunk Cost Fallacy

Recognizing the widespread nature of the sunk cost fallacy across various life domains can help us be more vigilant. By being aware, we're better equipped to make decisions that prioritize our future well-being and success over past expenditures. Here are 7 ways we can go about it:

• Awareness is key. Before making decisions, take a moment to reflect. Ask yourself if you're choosing something because it's genuinely beneficial or because you're already invested.
• Quantify your costs. Put a real value on your time, money, or effort. When you realize how much you're losing by sticking to a decision, it can make it easier to let go.
• Focus on the future. Train your mind to prioritize future benefits over past investments. Ask, “What will I gain in the future by continuing with this?” versus “How much have I already invested?”
• Embrace mistakes. Remember, it's human to make errors. What defines us isn't the mistake but how we pivot and learn from it.
• Consult a buddy. Talk it out. Sharing your dilemma with a trusted friend can provide clarity. They might see the situation more objectively than you can.
• Set limits. Before diving into a project, define your stopping points. For example, “I'll try this new hobby for three months. If it doesn't bring joy or value, I'll reassess.”
• Journal your decisions. Keeping a decision diary can help. Jot down the reasons for making a choice. Revisiting these notes can offer perspective when you're in the sunk cost conundrum.

Wrapping Up

Decisions shape our life. And while the sunk cost fallacy can seem like a pesky speed bump, with awareness and actionable strategies, you can navigate your decision-making journey with poise and clarity. Remember: every choice is an opportunity to learn and grow. And here at Reframe, we're all about growth! So the next time you're unsure about holding onto that unread book or uneaten pizza slice because you already paid for it, think again. Your future self will thank you!