How do you hit reset and go back to zero? How do you ignore sunk costs and pivot to something new?
This could be starting up a new job, ending a relationship, or using a new notetaking app. This is often a challenge as you are hamstrung as you seek to “make the most” of spent resources.
The sunk cost fallacy is the tendency to persist in an endeavor once an investment of effort, time, or money has been made.
Economists argue that sunk costs are no longer relevant to future rational decision-making. It is suggested that only marginal costs and benefits, not past costs, should factor into rational decision-making.
You make decisions based on the possible future value of objects, investments, and experiences. The truth is that you’re tainted by the emotional investments you’ve made, and you cannot move on.
In moments of financial, emotional, or temporal loss, you double down and lose more. You think that you’re somehow going to get back what’s already gone. If you remain blind to the dangers of the sunk cost fallacy, your losses quickly multiply.
Thinking Fast and Slow
In psychologist Daniel Kahneman’s book, Thinking Fast and Slow, he writes about how he and his colleague Amos Tversky researched the imbalance between losses and gains in your mind. They found that the brain uses snap decision-making to protect us from perceived threat.
Over the course of history, humans have placed more urgency on avoiding threats than on maximizing opportunities. We did this because we were more likely to survive and pass on our genes. The prospect of losses has become a more powerful motivator on your behavior than the promise of gains.
Complicating this issue, when you do consider losses, you don’t treat them all equally. Since all decisions involve uncertainty about the future, the human brain has evolved an automatic and unconscious system for judging how to proceed when a potential for loss arises.
To make decisions and not be weighed down by the sunk cost fallacy you must recognize your own biases. It’s important is to recognize and challenge them to ensure you are making the best decisions and judgments possible.
Cognitive Bias
Our perceptions about value and loss are formed by our experiences, culture, upbringing, and messages received through mass media. These are innate biases we learn over time, mostly unconsciously. These unconscious decisions distort our judgment and can lead to stereotyping and bad decision making.
There are numerous cognitive biases that impact our decisions, below I’ll identify 10 to watch out for.
- Anchoring Bias – Over-relying on the first piece of information obtained and using this as a baseline for comparisons.
- Availability Bias – Making decisions based on immediate information or examples that come to mind.
- Bandwagon Effect – Making a decision if there are others that also hold that belief or opinion. People tend to divide themselves into groups, and then attribute positive attributes to their own group. Also see group think and herd mentality.
- Choice-Supportive Bias – Once a decision is made, focusing on the benefits and ignoring or minimizing flaws.
- Confirmation Bias – Paying more attention to information that reinforces previously held beliefs and ignoring evidence to the contrary.
- False-Consensus Effect – Overestimating how much other people agree with their own beliefs, behaviors, attitudes, and values. Leads people not only to incorrectly think that everyone else agrees with them, but it can also lead to overvaluing of opinions.
- Halo Effect – Tendency for an initial impression of a person to influence what we think of them overall. Assuming that because someone is good or bad at one thing they will be equally good or bad at another.
- Self-Serving Bias – Tendency for people tend to give themselves credit for successes but lay the blame for failures on outside causes. This plays a role in protecting your self-esteem.
- Hindsight Bias – Tendency to see events, even random ones, as more predictable than they are. Also see the I knew it all along phenomenon.
- Misinformation Effect – Tendency for memories to be heavily influenced by things that happened after the actual event itself. These memories may be incorrect or misremembered.
Think Critically
The sunk cost fallacy impacts our decisions by making us feel like because we’ve spent money on something, we’re obligated to take advantage of what we received for our money. This model, thinking in options, not obligations, applies in any domain where you make a financial, emotional, or temporal investment.
In this post I shared a couple of cognitive biases, but there are many more out there. To learn more, check out this website from The School of Thought.
Remember, we make thousands of decisions every day, some more important than others. The purpose of this post is not to freeze any and all decisions. Rather the focus is on using critical thinking and a reflective stance as you make the ones that really matter.
Photo by Brett Jordan on Unsplash
This post is Day 76 of my #100DaysToOffload challenge. Want to get involved? Find out more at 100daystooffload.com.
Dr. O’Byrne,
Thanks for the insightful reminder on sunk cost. The concept was introduced to me long ago in my Undergraduate course on Engineering Economics. I had forgotten about it. Your article came up while searching for a less colloquial way to say, “doubling down,” or “flogging a dead horse.”
Because acting on impulses may sometimes be neurotic, perhaps escaping cognitive biases requires some transformative work as well? When someone forces their way through challenges, it could be misapplied will power, AKA overcompensating? Usually, people are not as desperate as that, but appraising the problem in this way may help clarify what to do about it?
I like to think of the neurotic, rigid Will power juxtaposed to a flexible Willingness. A willingness that is free and clear of a fearful bondage to ideas, bias, belief, and expectations. People become rigid and unwilling when afraid. I suppose that it may be tightly related to thinking fast. A virtue has been made out of this rigid, unyielding stance called, will power. It is a false form of the virtue. Similar to Willingness in purpose and power, but unhealthy and less effective.
Like identifying cognitive biases, awareness is needed to journey from will to willingness. Self acceptance as well. My definition. Willingness is a commitment of the heart to be free and clear of bias. The application of will becomes effortless and seemingly limitless. A flexible, limitless possibility for addressing challenges. Truer, and healthier as an athlete, engineer, business partner, friend or spouse. For those familiar with mindfulness, it is an accepting state of emptiness. Ready, alert, willing, available, able, flexible. Arrived upon by holding an accepting view of fear as a catalyst for alertness. Unfortunately, not only enlightened, but also transformed or at least on the journey.
Getting back to your article …
I appreciate seeing this list of cognitive biases. They seem like a useful short cut for negotiating with others. We engineers being so enthralled by our own perspective. Critical reasoning AND understanding bias traps that we each may fall into.
Thanks again, Rene
Rene,
Thank you for the thoughtful reflection on my article and for connecting it to key concepts like willingness versus willpower. I appreciate you drawing these connections to mindfulness and self-acceptance as well. Developing self-awareness of our cognitive biases and mental patterns is so important, though certainly easier said than done!
I’m glad you found the list of biases useful as “short cuts for negotiating with others.” Engineers do tend to get stuck in our own perspectives, so understanding common traps like sunk cost fallacy, confirmation bias, and optimism bias can hopefully make us more open-minded. Critical reasoning skills are crucial, and so is humility about our reasoning blindspots.
Your point about the need for personal transformation in addition to intellectual understanding is well taken. Just being aware of biases doesn’t free us from them; it requires work to shift from reactive, fear-based patterns to flexibility and willingness. This journey you describe from will to willingness is elegantly framed.
Thank you again for furthering this meaningful dialogue. Please feel free to connect if you have any other thoughts to share.
Best regards,
Ian