Ignore Sunk Costs: List of Biases in Judgment and Decision-Making, Part 1

It can be really fun to write a series of posts on a particular topic. By my count, I’ve done this at least seven times so far. Today, I’d like to start what I hope will be an oft-read series on biases in judgment and decision-making (to some, cognitive biases). Because of my background in psychology and my interest in decision-making, I thought it would be wise to share with you the things that I’ve learned either through the classes I’ve taken (the classes I’ve taught!) or the research I’ve read. With each bias, my goal is to explain the bias and offer some possible avenues for not falling into the trap of the bias. Today, we start with one of the big ones: the sunk cost fallacy.

Sunk costs are those costs that have already happened and can’t be recovered. For instance, let’s say you buy an apple and bite into it. The money you used to buy that apple can’t be recovered — it’s a sunk cost. Now let’s say the apple doesn’t taste very good (maybe it’s inorganic). You might say, ‘well, I’ve already paid for the apple, so I might as well eat it.’ NO! That’s the sunk cost fallacy! Just because you’ve already bought the apple and paid for it, doesn’t mean you have to eat it. If it tastes bad, by golly, don’t eat it!

That’s a rather basic example of the sunk cost fallacy, so let’s look at one that might seem a bit more applicable. Sunk costs often come into the fray when they’re contrasted with future costs. Let’s say you’ve bought a subscription to a newspaper or a magazine. Because of your subscription, you get a discount when it’s time to renew your subscription. Now, let’s say that in that year of your subscription, you discovered that there was another newspaper/magazine that you preferred (maybe The Economist?). When it comes time to renew your subscription, you look at the two options to either subscribe to The Economist or continuing with your other subscription. You find out that the discounted price for your current newspaper/magazine will be the same price as The Economist. You say to yourself, “well, I’ve already subscribed to this newspaper and spent so much money on it, so I might as well keep subscribing to it.” NO! That’s the sunk cost fallacy. The money you’ve spent on the subscription for the other newspaper/magazine can’t be recovered! You can’t get it back. As a result, it shouldn’t affect the decision you make now about whether to choose it or The Economist

There’s one more quick example that I want to highlight: war. From a paper by a professor at Princeton:

The United States has invested much in attempting to achieve its objectives. In addition to the many millions of dollars that have been spent, many thousands of lives have been lost, and an even greater number of lives have been irreparably damaged. If the United States withdraws from Vietnam without achieving its objectives, then all of these undeniably significant sacrifices would be wasted. [Emphasis added]

Pay particular attention to that last sentence. That is the sunk cost fallacy in action.

Ways for Avoiding the Sunk Cost Fallacy

So, now that we’ve looked at the sunk cost fallacy, how can we avoid it? Well, the first step in avoiding the sunk cost fallacy is recognizing it. Hopefully, the above examples have given you an idea of how this bias can arise. There are a two other ways I want to highlight that you can use to avoid this trap.

1) What am I assuming?

The crux of the sunk cost fallacy is based on an assumption. That is, you’re assuming that because you’ve already spent money on X, that you should keep spending money on X. If you look at what it is that you’re assuming about a situation, you just might find that you’re about to step into the sunk cost trap.

2) Are there alternatives?

Related to the above example is alternatives. You’re not bound to a decision because you’ve made a similar decision in the past. Just because you bought the ticket to go to the movie, if another activity presents itself as more enticing, you’re allowed to choose that one instead. In fact, if when you sit down to watch the movie, it’s bad, you’re allowed to get up and walk out. Don’t fall into the sunk cost trap thinking that you have to stay because you paid for it. There are any number of things you could be doing: going for a walk, calling an old friend, etc.

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18 responses to “Ignore Sunk Costs: List of Biases in Judgment and Decision-Making, Part 1

  1. Pingback: Loss Aversion and the Big Picture: List of Biases in Judgment and Decision-Making, Part 2 | Jeremiah Stanghini's Blog

  2. Pingback: The Endowment Effect – Yours Isn’t Always Better: List of Biases in Judgment and Decision-Making, Part 3 | Jeremiah Stanghini's Blog

  3. Pingback: Get a Second Opinion Before You Succumb to the Planning Fallacy: List of Biases in Judgment and Decision-Making, Part 4 | Jeremiah Stanghini's Blog

  4. Pingback: Perspective and the Framing Effect: List of Biases in Judgment and Decision-Making, Part 5 | Jeremiah Stanghini's Blog

  5. Pingback: The Confirmation Bias — What Do You Really Know: List of Biases in Judgment and Decision-Making, Part 6 | Jeremiah Stanghini's Blog

  6. Pingback: Don’t Fall for the Gambler’s Fallacy: List of Biases in Judgment and Decision-Making, Part 7 | Jeremiah Stanghini's Blog

  7. Pingback: Situations Dictate Behavior: List of Biases in Judgment and Decision-Making, Part 8 | Jeremiah Stanghini's Blog

  8. Pingback: When 99% Confident Leads to Wrongness 40% of the Time: List of Biases in Judgment and Decision-Making, Part 9 | Jeremiah Stanghini's Blog

  9. Pingback: WRAP — An Acronym from Decisive: List of Biases in Judgment and Decision-Making, Part 10 | Jeremiah Stanghini's Blog

  10. Pingback: He’s Not as Bad as it Seems and She’s Not as Good as it Seems: List of Biases in Judgment and Decision-Making, Part 11 | Jeremiah Stanghini's Blog

  11. Pingback: Neither the Beginning nor the End — Remember the Middle: List of Biases in Judgment and Decision-Making, Part 12 | Jeremiah Stanghini's Blog

  12. Pingback: If All You Have is a Hammer…: List of Biases in Judgment and Decision-Making, Part 13 | Jeremiah Stanghini's Blog

  13. Pingback: What’s the Status Quo From the Other Side: List of Biases in Judgment and Decision-Making, Part 14 | Jeremiah Stanghini's Blog

  14. Pingback: Hindsight is Always 20/20: List of Biases in Judgment and Decision-Making, Part 15 | Jeremiah Stanghini's Blog

  15. Pingback: Ways For Avoiding Cognitive Biases: List of Biases in Judgment and Decision-Making, Part 16 | Jeremiah Stanghini's Blog

  16. Pingback: The Top Ways For Avoiding Cognitive Biases: List of Biases in Judgment and Decision-Making, Part 17 | Jeremiah Stanghini's Blog

  17. Pingback: Try New Things: My Reintroduction to Merlot | Jeremiah Stanghini

  18. Pingback: Meditation Mitigates Effects of Cognitive Biases | Jeremiah Stanghini

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