Pull the damn plug right now

After reading this article, you’ll learn:

1. What is the sunk cost fallacy.

2. Why you should know about it.

3. How to overcome it.

Do these scenarios seem familiar to you? :

• Pouring more money into a failing business / stock.

• Suffering through a horrible movie because “you paid to watch it”.

• Pursuing a degree you hate because you’ve already spent a lot of time on it.

If you’ve experienced any of these, then you’ve fallen prey to the sunk cost fallacy.

It is a cognitive bias which makes you pour more money, time or effort into something because you’ve “sunk” so much into it already.

Why should you know about this?

The way you think shapes your life. Learning about such biases means you’ll be better off than 90% of those who do not know about it.

You never know - the direction of your life may change.

Sunk cost fallacy can be seen at both individual and organizational levels. For an example at organizational level which involved billions of Dollars, check out this article on the Concorde project.

Clearly, a lot is at stake because of the sunk cost fallacy. Some examples in different spheres of life:

1. Career:

   • Being in a miserable job because “it pays well”.

   • Not changing industries because you’re “experienced'“.

2. Relationships:

   • Continuing a toxic relationship because you’ve been together for a while.

   • Spending more time in a one - sided friendship.

3. Personal

   • Continuing a hobby where you’ve lost interest because you’ve already invested a lot of time.

   • Continuing to read a bad book because you’ve started and your habit is to always complete things.

How to overcome the sunk cost fallacy?

1. Understand the concept and recognize the common examples.

   The first step is awareness. Ensure you understand what this is and why this happens. This will give you the greatest chances of identifying scenarios in the future.

   The reasons behind sunk cost fallacy is also explained by other fascinating theories called Loss aversion, prospect theory and law of diminishing returns, about which I’ll write in future editions.

2. Audit

   What is measured, improves. To know if you have to change/ stop something, you have to first know what’s going on. You can audit a few weeks of your time and group activities into two columns:

   • Energy drain.

   • Energy gain.

   When you see patterns of energy drainers, know it’s time to change something.

3. Detach emotions from the decision.

   The second noble truth of Buddhism says that pain is caused by emotional attachment to things.

   Often we fear not pulling the plug because of this simple reason. We hate pain and we are averse to loss.

4. Fear setting.

   This is one of the most awesome things I learnt from Tim Ferris. Using principles from Buddhism and Stoicism, he has created this framework.

   What we most fear doing, are very often exactly what we need to do. Watch the video here.

5. Calculate the opportunity costs.

   Ignore this if you do the fear setting exercise. Otherwise, check what’s the opportunity cost you will lose if you do not act.

   e.g. If I’m in a soul - sucking job, the opportunity cost I’m losing may be:

   • Peace of mind.

   • Better quality of life.

   • Chance to learn new stuff.

Hope this knowledge helps you become a better thinker.

If you found this useful, please share with someone who will benefit.

Further reading

1. The Sunk Cost Fallacy: How It Affects Your Life Decisions.

2. How the sunk cost fallacy influences our decisions.