Sunk cost Fallacy - The background Psychology

Darryl Bachmeier
Sep 1, 2019
Strategy


We all have had experience the sunk cost fallacy either consciously or unconsciously. Often we buy some expensive stuff from the market and then tend to overuse to compensate for the price paid on the purchase. Similarly, while purchasing any meal bucket from fast food, we eat as much as possible, not out of hunger just because of the money involved in buying that meal. The phenomenon is equally true for a time as well as effort apart from the money invested.

The Logic Behind the Sunk cost fallacy

The irrational behaviour which is consistent even after investment in time, money or effort has been made lead to sunk cost fallacy. People who fall in the trap of sunk cost fallacy find benefits associated with their investment, which ultimately becomes the strongest urge to continue working on the project. Humans measure the effectiveness of any decision in the light of cost-benefit analysis. The idea is not limited to the money, it goes well with time and effort as well. It often happens that while watching a movie, when you reach the interval and it seems bored, you don’t quit rather keep watching because your time and effort has already been wasted so you keep dragging it till the end.

Commitment Bias in the light of sunk cost fallacy

The decision making in humans is not rational and mostly influenced by the involvement of emotions. When we think of some plan and invest in that, the feeling of remorse or guilt overcomes in case of inability of fulfilling and not working in that direction. This leads to the commitment bias, which means our consistent effort remains to support past decisions despite those not being the successful ones.

It is pertinent to mention that whatever time, money and effort we have put in someplace, object or someone; can never be reverted. We shape our decisions, which are shaped by the previous cost incurred on such choices instead of making fresh cost-benefit analysis.

Loss aversion in the light of sunk cost fallacy

In literature, sunk cost fallacy also occur primarily due to loss aversion. It says individual tends to overweight loss associated with any investment and gains are left at the back. We focus more on the losses associated with such actions rather counting gains. Again the notion takes us back to our past, whereas decisions are taken based on choices made in the past so the loss could be averted. During this process, the incurred benefits are completely lost.

Why is it essential to do so?

The impact of sunk cost fallacy in our lives is huge. The process not only impacts our everyday decisions; it also affects decisions in the long run. Humans make a rational decision which leads to optimal outcomes. Our focus remains on past investment and keep ourselves stick to the decisions with the least benefit to us. It is like a vicious cycle, we keep investing money, efforts and time on things which we have already used or incurred. When we invest more, we feel more inclined towards working towards it, which leads to the utilization of more resources accordingly.

Can we avoid sunk cost fallacy?

As stated above we all are involved in this fallacy either consciously or unconsciously. If we ever figure out that we are falling prey to this, we can start analysing our decisions in the light of current scenarios’ and then map our efforts. The effort should be to invest in the concrete action plan rather having the guilty feeling. Also whenever the involvement of emotions is removed from decision making, the trap of sunk cost fallacy can no longer trap us.

As humans, emotions are part and parcel of our lives and play an essential role in influencing our decisions. With the indulgence of information technology, the rationalization can supersede the emotional aspect and help us from falling for the sunk cost fallacy.

Sunk cost fallacy is all about our efforts to continue pursuing investment even when we know the investment cannot be recovered. It all happens when our emotions rule us and influence rational decision making. It happens because mere abandoning efforts towards such investment lead to the feeling of guilt and remorse. Thus, to avoid such negative feelings, we tend to follow the past pattern of decision making which is based on the previously made investment.

The logic behind the process is that we try to avoid negative feelings linked with our emotions. We should take our emotions out of proportion when making any decision, so it turns out to be rational. In reality, it is pretty hard to ignore and let go of our emotions. It is wise to use technology which helps in being rational, thus avoiding indulgence of emotions. Once decisions are rationally made, the sunk cost fallacy can easily be kept out.

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