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.
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.
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.