How the Sunk Cost Fallacy Wastes Your Time, Money and Happiness

This is another of those times when your brain is designed to shoot you in the foot.

Let’s say you bought stock in a company. You were excited about its prospects. Then the price went down. And down, And down some more.

What do most people do? They hang on to it. Why? The most frequent answer is that they don’t want to lose that initial investment: their “sunk cost.” They keep hoping things will turn around. Even when it becomes clear that this isn’t going to happen.

The reason this is called the sunk cost fallacy is that their investment — in this case, the money — is already gone and not coming back. This means they’re basing their information on true but useless information.

We do this too often with decisions about time, money and emotional investments.

Here’s what’s happening.

This decision-making process is compounded by anchor bias: being overly affected by the first bit of information we had on a topic (in this case, the amount of money you plunked down for that stock).

It’s true: our brains are pattern-seeking organs. We look at the past when weighing future opportunities.

But with the sunk cost fallacy, we dig in our heels because we’re afraid of losing something. Ironically, it’s something that’s already gone — no matter what we do now. Then we choose to continue to act in a way that isn’t working and hope it will have a good return at some point. Not bloody likely.

When you’re feeling that regret or worry, decide to focus on the future instead. Knowing what you know now, what do you want to see happen? Base your choice on this. Chances are good the outcome will be better than just “staying the course” through fear of loss.