Consider the following scenario. You join a debate club to sharpen your debating and public speaking skills. You pay $200 for eight classes. You attend two classes and realize that you simply do not enjoyit.

May be the instructor is too strict, your co-debaters are not fun to talk to, you are not learning as much as you thought you would, or you simply do not like the atmosphere for some other reason. However, you still feel compelled to go to the class, because you have already paid for it. After all, why waste your hard-earned money, right?

Turns out, it is not the right decision. The only reason why you made the decision in the first place is that you

are a victim of the sunk cost fallacy.

What is it?

Sunk cost fallacy is all about suboptimal, irrational, and backwards looking decision making. It happens when you decide to do something solely because of sunk costs – the resources that you have already invested, but cannot be recouped.

In the aforementioned example, you want to attend the class because you have already paid for it, despite the fact that you hate it. It is an irrational decision, because you are basing it on a sunk cost which cannot be recouped. Look at it this way – you have already wasted $200 on it.

Do you also want to waste a few hours of your life on it? By deciding to skip the classes, your loss is limited to the fee you already paid, which cannot be recovered. By deciding to attend the classes, however, you are actually intentionally wasting your time, which is entirely avoidable.

Sunk Cost Fallacy in Daily Life

One thing you need to know is that sunk costs are not limited to money alone. Some people like to continue with loss-making projects simply because they have invested too much time and effort into them. Some people do so because of pride – they would rather suffer losses than admit they made a bad decision in the first place.

People often fall victim to the sunk cost fallacy without even realizing it. They order an expensive dish at a restaurant, only to find out that it tastes terrible, but still eat it because they have to pay for it anyway. They go to a movie, regret the decision instantly because it is a bad movie, but watch it anyway because they have paid for the ticket.

In each of these situations, you are basing your decision on a sunk cost – a resource that you already invested and cannot be recovered. By doubling down on your decision, you are actually wasting your resources and increasing your chances of suffering further losses – monetary or otherwise.

Avoiding the Trap of Sunk Cost Fallacy

• The first thing you need to understand is that a sunk cost is a loss you have already suffered. It is in the past and you will not be able to get it back irrespective of the future outcomes. So, you need to stop throwing good money after bad, try to minimize your losses, and walk away.
• Second, do not let your emotions affect your decision making process. Do not be too proud or too scared to admit that you are wrong and have made a bad decision. It is entirely human to err and even the best of us make mistakes at times.
• Third, do not get too attached to your commitments. The more attached you are to something, the more difficult it will be for you to let it go.
• Finally, do not lose sight of your long term goals. Do not let a sunk cost – a few hundred dollars of money or a few hours of your time and effort – impede your progress towards long term goals. In the grand scheme of things, small sunk costs do not matter.

Basically, you need to be mindful of the present and let go of the past entirely while making a decision. It is the most effective way to avoid falling victim to the sunk cost fallacy.