Imagine that you go to see a movie. You pay for a ticket and take your seat. But about 30 minutes in, you realize that the movie you’re watching is terrible. What should you do?
If you’re like most people, you’ll finish the movie anyway. You’ve paid for it, after all, and you want to get your money’s worth.
But that decision is actually irrational. Why? Because the ticket purchase is a “sunk cost”; it’s money already spent that cannot be recovered.
And, as economists will tell you, sunk costs are not taken into account when making rational decisions.
What’s Been Lost is Irrelevant
How so? Well, in the movie scenario, you have two choices:
- Pay the price of the ticket and waste the time it takes to finish it.
- Pay the price of the ticket and not waste the time it takes to finish it.
Since the second option only involves one loss (money spent), while the first involves two losses (money spent and time wasted), an economist would say that the second option is obviously preferable.
You’ve already paid for the ticket, so that part of the decision no longer affects the future. Therefore, the current choice should be based solely on whether you want to see the movie at all, regardless of the price, just as if it were free.
Now, of course, that’s easier said than done. In reality, we often fall for the “sunk cost fallacy” and routinely let our current actions be affected by the money, time, and effort we’ve previously invested into something.1
The Sunk Cost Fallacy
This tendency shows up all the time in small everyday decisions like:
- “I’m full, but I might as well keep eating because I’ve paid for the food.”
- “This book is boring, but I’ve already read 100 pages so I might as well finish it.”
- “I haven’t used this sweater in years, but it was so expensive that I have to keep it.”
And it can also affect big life decisions like:
- “I’ve invested so much into this business venture that I might as well keep pouring money into it.”
- “This career isn’t fulfilling to me, but I’ll stick to it because I’ve invested so much time and money into my education.”
- “I know my partner is bad for me, but we’ve been together for so long that it wouldn’t make sense to leave.”
As you can imagine, the sunk cost fallacy can have a considerable influence on our lives. So, when you make decisions, try to let bygones be bygones. Ignore costs from the past, base your decision solely on the present, and you’ll be much better off in the future.
This article is an excerpt from my book The Decision-Making Blueprint.