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newstasis :: a blog about improving wellness » Blog Archive » Sunk Cost - Another Way The Past Influences Your Future

Sunk Cost - Another Way The Past Influences Your Future

Sunk cost is regarded as the amount of money / resources that have already been spend / invested into something that cannot be recouped. These costs have already been incurred regardless of the outcome.

For example, spending $5000 digging a hole in the back yard for a swimming pool. Regardless of how you proceed after the hole has been dug, you cannot get the $5000 back; filling in the hole will not return the money. Another example is working on a relationship - you can spend 6 months going to therapy in an effort to mend things with no guarantee that you’ll both grow old together.

The issue with sunk costs is that they can bias perspective and effect decision making because we can tend to place a higher value on past actions vs. future actions. A number of studies have shown that people become more certain about their decisions after they make them - those who bet on a sporting event will immediately become more confident that their desired outcome will be the eventual outcome once they place their wager.

The reality is very different. While the betting odds can change as a result of more people betting on an outcome, and while those people will become more certain about the outcome, NOTHING about the outcome has changed. The team that was going to win is still going to win. The actions of those outside of the system will have no impact on the actions inside the system.

To put is another way, what is the eventual outcome is going to be the outcome regardless of any sunk cost. Sinking cost into a bad decision will not make it a good decision REGARDLESS of any perceptual tendency to think that it does.

Given the human tendency to further invest in poor choice because of sunk cost, it’s easy to see how this can have a detrimental impact on ones life. Alternative options will not be considered or will be viewed less favorably and resources will continue to be invested into a poor decision. What is viewed as unworkable from an external and objective point of view can be viewed as worthy of continued effort by those who are involved and subjectively engaged in the process.

How do you know when you are being impacted by sunk costs?

  • You’ll hear yourself saying or thinking “well, I’ve put this much into it already” while you have a feeling that walking away will be a waste of that effort. In this instance, you have already realized the eventual outcome but rationalizing a delay by looking at the sunk cost. Immediate action is both appropriate and needed here.
  • You have a tendency to view things in terms of win:lose and not from a perspective of what was the lesson from an experience. You don’t want to lose so you continue in a failing attempt to win. In reality both are abstract and meaningless distinctions. If you choose personal growth from an experience you will be able to move forward very quickly because you’ll view the sunk cost as the price for a powerful lesson.
  • You are fearful to consider different alternatives because of a sense of wasted time / money / resources. This is an indication that you are not being objective and open minded, a clear indication that something illogical is at play.
  • You have a scarcity view of the world and believe that you may not ever have the sunk resources again. Being loss avoidant isn’t necessarily a bad thing, but when you hold a view that what has been spend cannot ever be regained, you are not looking at the future accurately. The consequence is that you end-up pouring MORE resources into something that is a lost cause; this will increase the scarcity of resources making real the very thing you are trying to avoid.

There are times to stay and persevere and there are times to learn a lesson and change your course. The right thing to do is the thing that is objectively and statistically the most probable way to achieve your goal. The wrong thing to do is to avoid unpacking your reasons for staying because you believe everything would be a waste if you were to stop.

Sunk costs impair rational thinking so if you are in a situation and have spend a lot of resources on it, be mindful that your natural tendency will be to view continuing as the best course of action. It may be, but take the time to see the potential costs of continuing and to evaluate the situation for what it actually is right now vs. what it was when you made the decision to invest in it.

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