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The Sunk Cost Fallacy

It’s irrational to consider a sunk cost in any part of any decision. 

You’ll know a sunk cost is something that you’ve spent or invested, where there is little to no chance of you getting your initial investment back – it’s gone – It’s sunk. This becomes a problem when you’re using a sunk cost to base a future decision on; this is because this results in BAD decision-making.

Imagine this; You’ve just picked up a book and you realise that 97 pages in, you don’t like the book and you feel like putting the book down and starting a new one. The book could be an Amazon top seller or whatever, but you feel like putting it down and just starting a new book. The subsequent thought that goes on in your head is that, “Well, I’ve read 97 pages now; if I put the book down now, those 97 pages will have gone to waste.”

By reading however many pages that are left is no way going to release you from that state of feeling unhappy with the book irrespective of the 97 pages you’ve already read. No one is going to gain or get any additional value from you finishing the book and at the same time you will be wasting your time on something you’re not enjoying.

Being sentimental about your resources that you’ve invested will usually lead to further resources being wasted.

We all fall victim to what some call the ‘Sunk Cost Fallacy’, simply based on the fact that, by the time the decision comes to leave or stop something, we’ve invested some kind of resource like money, time, energy etc, which naturally, sometimes, makes the job harder for most people to quit or stop something.

The problem however really lies with not knowing what’s going on during the decision-making process in your head. The ways in which to really understand and get better in understanding what’s going on while your making a decision is to simply do the following:

  1. Simply educate yourself about what a sunk cost is
  2. Be self-aware of your own decision-making process
  3. When in the decision-making process, consciously take a step back and consider your outcome with the knowledge of the sunk cost fallacy
  4. Review your decision and change if necessary

Next time you start that film, where you’ve invested thirty minutes of your time in to, don’t be afraid to just get up and walk away. Spending another hour watching that film will not give you any additional value, so go and do something else you’d maybe enjoy by ignoring the sunk cost of the thirty minutes.

Don’t waste any more resources than necessary.

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It’s Time to Quit

Controversial, I know. The only thing you hear nowadays is if you quit, you lose; winners never quit and quitters never win and so on, but ignore the people who tell you that; let me tell you why.

Evidently, no one has ever told these people about sunk costs and opportunity costs; the two most significant variables that should be taken in to consideration when making a decision or thinking about quitting. Let me explain:

1. Sunk cost:

“A cost that has already been incurred and thus cannot be recovered. Sunk costs are independent of any event that may occur in the future.”Investopedia

A sunk cost, in simple terms, is a cost that has already been incurred from a previous opportunity or decision that’s been made. This could include a financial investment made to start a part-time hair and beauty course or a gym membership subscription.

2. Opportunity Cost:

“The benefits you could have received by taking an alternative action.”Investopedia

An opportunity cost is essentially the cost of an opportunity or the missing of a benefit that may come from an alternative opportunity e.g. missing the benefit you may make if you started playing badminton instead of going to the gym or changing your course from a hair and beauty course to an accounting course.

The difference between these two variables is that, a sunk cost is backwards looking and the opportunity cost is  forwards looking. Secondly, a sunk cost is unavoidable, where an opportunity cost is avoidable.

In order to make a decision on if whether to quit or not, what you have to do, as the decision maker here, is to quantify, in some way, the difference between these two variables by understanding, which will offer the most benefit to you – either to keep on paying for something that you want to quit and not gaining maximum benefit from, or to gather benefit from another opportunity and quit whatever you’re doing now. You may have to be a little creative when quantifying benefits, as mostly, these won’t come in simple number or money terms; they could even be happiness, peace of mind or time saved.

Decision Maker: If the benefit from another opportunity outweighs the benefit from whatever you’re doing currently, then you should quit immediately.

I hope you will agree with me when I say, It’s not worth wasting precious resources like time, money, energy, your mental health on things that aren’t giving you the benefits you want.

Let me give you an example: You’ve just joined the gym and are paying £50 a month. The problem is that you hardly go because you’re so busy with work and commute long distances. The next thing is that, when you do go, which is once a week, you hate being there and find it a chore. You’ve now been paying £50 for three months and are thinking of quitting, but have some friends who say, the gym is good for your health and that you should keep going and only losers quit and so on.
You’ve been presented with an opportunity, where your neighbour has asked if you would like to join their badminton class for £50. You used to play badminton a couple of years ago and would enjoy the company and would find it less of a chore.
The costs and benefits between these two situations is as follows:

  1. You feel you would enjoy badminton more, as you used to play it before;*
  2. You would prefer the company, where in the gym it’s just yourself;*
  3. You may find yourself going more than once a week because you will probably enjoy badminton;*
  4. Both propositions cost the same (£50);*
  5. You can go to the gym on your own, whenever you feel like it;
  6. You find the gym a chore;*
  7. You hate going on your own* and
  8. You’ve paid £150 through you’re gym membership subscription already.

You’ll note that there’s no difference in cost and that you’ve already spent £150 on your gym membership, but that’s money gone and you can’t do anything about that – it’s a sunk cost.
Now, the logical, rational decision here should be to quit the gym. There are clearly more benefits achievable with badminton compared to the gym (which I’ve marked with asterisks above) and as a result, you will be achieving more value from your £50 investment. Sure, you’ve lost £150, but do you really feel like losing another £50 and so on by going to the gym because you’ve already invested £150? Common sense says, you should be a quitter and join your neighbour to play badminton.

This approach to decision-making is applicable to anything in life, both from your decision about your fitness, or to a financial decision. The question you really need to be asking yourself is, “is the new thing that I’m going to do, after quitting what I’m already doing, going to give me more value?” ‘Value’ can be anything from financial, emotional value or anything else. If ‘Yes’, then the sunk cost is irrelevant because it’s gone and you can’t get it back; it’s unavoidable. What is avoidable is how much you carry on spending on it by not quitting.

It’s time to quit.