Consider this scenario.
You are on your way to the store. Halfway there, you realize the store is closed.
A pretty common event. One that has most likely happened to us all at one time or another. It’s how we react that is interesting.
One of these reactions would be to abandon our trip the moment we realize the store is closed. Another is to soldier on, convincing ourselves that moving forward is the only way to justify the time and energy we used getting ourselves halfway there.
Julia Galef*, president of the Center for Applied Rationality, is the first to admit that this is, “a transparently silly way to reason” and “doubts that any of us would actually go all the way to a store we knew was closed.” However, this type of thinking is common, as common as the scenario itself, and is at the heart of what the fields of business and economics call sunk costs, or if you prefer, the fallacy of sunk costs.
Sunk costs are defined as costs that have already been incurred and cannot be recovered. Proponents of the sunk cost fallacy argue that since it is a cost paid in the past and unrecoverable, it should be removed from any future decision making. But that does not stop sunk costs from being a part of our psyche.
In the scenario of our venture to the store, it’s probably easy to say, yes, cut bait and return home. But what if the scenario changed a bit, or there was more at stake?
What if your realization was not that the store is closed but that it is closing soon? What if today was February 14th and the item you needed was a gift for your significant other? Might you then reconsider abandoning the trip? Perhaps you might even consider running red lights and dodging pedestrians in the crosswalk.
Believe it or not, the stakes can be even higher than a forgotten gift on Valentine’s Day.
Galef said, “You’re in a career and it’s becoming more and more clear to you that this actually isn’t a very fulfilling career for you and you’d probably be happier somewhere else but you figure I’ll just stick with it because I don’t want my past ten years of effort and time and money to have been wasted.”
And that can be the natural mindset, particularly when talking about life-altering decisions like changing careers or even buying a house. Sunk costs can even have an impact at a national level, as is the case in the analysis of the UK and France’s decision to continue the expensive supersonic jet program, Concorde, well passed when many considered it still viable.
The sunk cost fallacy, in a way, is not just forgetting the time, money, and effort that went into producing something, but not allowing it to blind us to what we truly want or need.
“The sunk cost fallacy means making a choice not based on what outcome you think is going to be the best moving forward, but instead based on a desire to not see your past investment go to waste,” said Galef.
Quality, as always, wants to provide you with the information you need to help make the best decisions possible, for the best outcomes possible. So check out “ERP Software and How it Can Help You” and everything else we have to offer in this month’s Quality.
By the way, on a personal note, because of the sunk cost fallacy, I will never again sit through an entire movie hoping it will “get good” when I knew 20 minutes in that it was going to be bad.
Enjoy and thanks for reading!
*From her YouTube video, “The Sunk Costs Fallacy,” for Big Think.
Darryl Seland is the editorial director of Quality magazine.