What do we say to the Sunk Cost Trap?

Cue your inner Arya Stark

How many times have you pursued an underwhelming Netflix series, continually hoping that the next episode will be better than the last? The show continues on a downward trajectory and before you know it, you’re part-way through the second season of The OA, the plot has refused to thicken and character development has diminished further than you once conceived possible.

Time to quit?

No.

You’re almost two seasons down and feel the need to persevere until the end. Several hours of television time later and you’ve begrudgingly completed the series, which as expected, fell far below your expectations. And let’s be honest, you probably would have watched another season had Netflix not taken the decision to cancel it. Whilst your loyalty and optimism are commendable, you my friend, have fallen foul of the sunk cost fallacy.

Sunk costs are unrecoverable investments. The sunk cost effect, also known as the sunk cost trap or fallacy, refers to our inherent nature to continue investing our resources when we should really cut our losses. This is driven by a very human reluctance to accept that our investments to date have gone to waste.

The majority of us encounter the sunk cost trap in ordinary life, and the concept extends far beyond Netflix.

Much to the demise of our inner peace, many of us have remained in undeserving relationships for longer than we ought to. Oftentimes, the predominant driver of the decision to do so is the time and effort that has been committed to the relationship to date. Here, time and effort are the sunk costs and to stay in the relationship in a bid to not “lose” or “waste” said costs is a prime example of the fallacy in action. Of course, the real shame would be committing even more resources to the relationship, only to walk away further down the line, or worse, remaining in the unhealthy relationship indefinitely.

On the flipside, let’s imagine that you’re in a fantastic relationship and in the process of planning your wedding day. You’ve found the ideal venue and have put the deposit down when suddenly, hidden costs transpire and it’s clear that the actual cost of the wedding venue will be well out of budget. Upon this realisation, will you,

(a) continue with the venue on the basis that the deposit has already been paid, or

(b) knowing that you will lose your deposit, withdraw from the venue, adjust your budget in line with incurred losses, and seek a deceit-free alternative?

The former approach illustrates a classic case of the sunk cost effect, whereas the latter is the financially smarter decision.

Let’s say that you opted for option b above, i.e. you found a financially sensible venue but, drama ensues, and a week before the wedding you find out that your partner has committed a cardinal sin, hereby deeming them no longer marriable. Of the many things that your partner deserves, your hand is not one. Not only have you invested your time and effort into the relationship and subsequent wedding planning, your guests have made investments too; gifts have been bought, hotels have been booked and children have been taken out of school just for your big day.

Will the multitude of spent investments guilt you into proceeding with the wedding, or will you choose to defy the trap?

Cutting your losses can be a complex and courageous feat. After all, we’re only human and tend to have a natural preference for loss aversion. Plus oftentimes, our unwise choices result in a necessary learning curve through which we develop resilience and character, which can be integral to the fabric of our future successes. The point is not to fear failure or adopt a quitting mentality. Rather, to stay conscious of the sunk cost effect and when the situation calls for it, to walk away from suboptimal meals, movies and men.

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