Out of the Rip: Understanding Sunk Cost Fallacy to Save Yourself from Drowning

Sunk Cost Fallacy pic

When it comes to making an investment – whether it be towards business, relationships or creative projects – it is imperative to understand a concept called the Sunk Cost Fallacy because it will ultimately save you money, time, effort, and heartache. Simply put, Sunk Cost Fallacy refers to the unrecoverable payments you make based on your perception of their future value. It is also often accompanied by an irrational emotional imperative to escalate your commitment even when there is no proof of benefit or a return on investment in the short- or long-term. This emotional response rests on the notion that the more you invest in something the harder it is to abandon it—“I can’t stop now otherwise I’ll lose what I’ve already invested.”

Sunk Cost Fallacy is the corner stone of romance scams, overbidding at auctions, failed military campaigns, enduring the entirety of a horrible movie just because you have paid for the ticket, as well as staying in miserable relationships, doomed business ventures and hopeless creative projects. Things are not working but you still cling to the proposition because you have committed so much time and money and effort into it with the hope (or illusion) it must pay off somewhere down the line. The dynamics are such that you focus on the past and look backwards towards something you have “paid” or “invested” rather than looking at the present or future to ascertain rationally whether your project has been successful.

In his article “Letting Go of Sunk Costs: How to escape the past”, Robert L Leahy, PhD explains the dynamics at play within Sunk Cost Fallacy. Sunk costs can be attributed to:

  • Loss aversion, which is where you don’t like the idea or feeling of losing;
  • Commitment theory, which is where you get stuck in a commitment no matter the cost to you;
  • Cognitive-dissonance theory, which is where you attempt to make sense or justify a cost by exaggerating the benefits;
  • Prospect theory and loss frames, which is where you frame change as loss rather than gain;
  • Fear of wasting, which is where you want to prove that it was not a waste so you stay in hoping things will improve; and
  • Inaction inertia, which is where it’s easier for you not to change rather than initiate change, partly because of fear of immediate regret.

In each case there is an absence of reward and the employment of defence mechanisms such as justification, rationalisation and denial that keep you trapped in a vicious cycle of investing more with the empty promise of gaining something… anything… more of nothing.

Sometimes the very core values you hold in high esteem are the ones that can work against you. These include loyalty, persistence, willpower and altruism. If you feel you may be a fully-fledged participant in a situation where Sunk Cost Fallacy could be at work then here are 10 tips on how to save yourself from drowning:

  1. Take responsibility for your thoughts and actions – Be self-aware, review and reflect, and always ask the pivotal question “Why?” to the offers placed in front of you, as well as to your emotional reactions to them.
  2. Deconstruct the scenario – Do a reality check. Examine all the clues and information that has come forth since your original decision—have your expectations been met or has there been some sort of bait and switch or carrot dangled in front of you? What are the un-kept promises or commitments other people within the scenario have made to you? Is there a stagnation or forward momentum on the project or situation? Creating a pros and cons list is a good starting point, as is examining a timesheet or a balance sheet in factual terms rather than emotional ones to see if the cost benefits have decreased, increased or stayed the same over time.
  3. Slow down your thinking and decision making – Review a proposal and wait 48 hours or more to make both decisions to avoid being driven by impulses, or other people’s psychological button pushing (eg. creating a sense of urgency, danger, pleasure or pain).
  4. Audit your emotions – Take a break away from the situation so that you are not caught in the rip. Examine any feelings of resentment, anger, obsession, or other that might be clouding your judgement or propelling you to act irrationally.
  5. Follow your intuition – Take note of any red flags or feelings of discomfort or suspicion that might be popping up within you. Then take heed of them.
  6. Educate yourself on the psychology of others – Who is collaborating in the given scenario with you? Fraudsters and narcissists (or other game players)? Profound procrastinators? Or someone of another ilk? Then ask yourself… Do you share the same core values? Do you share the same ambitions? Do you share the same intentions? The answers to these questions will help you find clarity.
  7. Examine other opportunities – Look at whether you are walking on a path that lead to nowhere, as opposed to a pathway that leads to a situation that lines up with your goals, values and success criteria. Ask yourself whether you are you trying to prove something to yourself or the world, and then only embark on journeys that align with your calling and values.
  8. Reframe your decision-making process – Here’s an eye opener… could it in fact be a good decision rather than a bad decision to abandon a sunk cost? Incredible shifts can take place after abandoning a sunk cost as you reorient yourself to a new direction and new beginning. Accept that others might criticise you or call you a quitter or a fool. To paraphrase Dr Phil: “The only thing worse than being in a bad relationship [OR A BAD BUSINESS DEAL OR A BAD INVESTMENT!] for a year is being in a bad relationship for a year and one day.”
  9. Know when to quit – Commit only to a certain amount of hours or to the completion of an initial stage in the arrangement. Put a deadline in place. Make it a quiet one. Don’t advertise it. If things go awry and have not turned around by a certain day or time then stick with your decision and withdraw from the situation.
  10. Understand the emotional aftermath – Accept that you might feel bad or a remove yourself from the scenario. But also take some time out to contemplate the bigger picture… that you have shown courage to honour yourself. Be kind to yourself and allow yourself to walk through the aftermath until you find the relief and equilibrium you need to start the next phase of your life.

Just remember that whatever endeavour you embark upon there needs to be movement towards a real goal, as well as a gain or benefit of some kind that you have defined at the start. Ultimately, make a decision to live in truth no matter how painful it might be… be prepared to admit that your effort was fruitless and losses were permanent, and that your relationship was challenging and ultimately doomed. In so doing you will be gain better instincts, make better decisions, and take the necessary course corrections to avoid making them again in the future.

© Julie Ditrich, 2016

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