“Recognize reality even when you don't like it—especially when you don't like it”.
- Charlie Munger
It’s 11 pm, you’re tired and angry and all you want to do is close your laptop and go to bed.
But you can’t.
With the deadline (self-imposed) fast approaching you’re in this until it’s finished. You’ve invested too much time, effort, and resources to quit now.
And besides, you aren’t a quitter, are you?
This scenario could be one of infinite possibilities where you feel you must follow through with X because you’ve invested Y. This is the workings of the Sunk Cost Fallacy.
Today, we’ll learn what it is, how to spot it and know when to quit.
What is the Sunk Cost Fallacy?
The “Sunk Cost Fallacy” refers to the irrational decision to continue investing time, money, or effort into something simply because you’ve already invested resources into it, even when it no longer makes sense to do so.
People cling to past commitments because of a psychological bias to avoid admitting failure or loss, even though the rational course of action would be to cut their losses and move on. This could fall under Charlie Munger’s Inconsistency-Avoidance Tendency or Simple, Pain Avoiding Psychological Denial Tendency.
However you choose to label it, it’s a problem.
Here are some examples:
You continue a course or project you no longer wish to complete despite losing interest.
You continue to read a book because you’re halfway through it even though it bores you to tears.
You invested in a stock that has underperformed for years. Instead of admitting you may have got it wrong, you ‘hope’ that it’ll turn around (for the sake of your pride).
You continue a relationship you know is either harmful, going nowhere, not for you or worse, all three because you feel ‘trapped.’
You continue a career path out of obligation to student debt, peer pressure or family scrutiny.
These are not ‘out there’ examples. People are living these scenarios day in and day out. In work today, look around at your peers and someone will be going through this.
Let’s look at fixing this.
How to Spot the Sunk Cost Fallacy
There is a difference between not wanting to continue a project that work requires you to do and a personal one. The Sunk Cost Fallacy mainly refers to the pressure you put on yourself, although, you could also feel this as a result of time, money or other investment in you by somebody else i.e. your work!
When you feel that you might be under the spell of the Sunk Cost Fallacy a simple way of knowing is to ask yourself one of the most beautiful questions one can ask-why.
Why am I doing this? Why is it important to me? Why do I feel compelled to do this?
Why did I not ask why, earlier?
A lot of the time you won’t know. You’ll say “I don’t know” and then, more than likely you’ll probably say something like “Because I have to” or “Because X needs me to do this.”
If your answer isn’t “Because I want to do this” or “Although I’m not enjoying this now, I know there’s something at the end of it for me” like completing a marathon then what’s the reason you’re doing it?
Spotting the Sunk Cost Fallacy requires introspection and self-reflection. It also requires honesty and integrity. For most people, these are pretty standard principles they follow most of the time when dealing with others but when it comes to being honest with ourselves it’s a bit more murky. We really can pull the wool over our own eyes!
So, when is it ok to quit and when is it not?
Knowing When to Quit
Rightly or wrongly we live in a society that champions winners and deplores losers. Nobody wants to be a loser and as far as I know, there aren’t any Hollywood films about the wars we didn’t have!
A helpful starting place for helping you get out of the pickle you find yourself in is twofold. Understand both these mental models:
Cost-Benefit, &
Opportunity Cost
Cost-Benefit refers to the previous cost of the investment (project, book, relationship, education etc) and weighing them against the remaining future costs (continuing) and potential benefits of doing so.
You could surmise that finishing your last year of university has the potential for a better career. If this is important to you, then finishing the last year, although hard, might be worth doing.
In regards to the poor relationship you’re in, you could say that promises were made years ago that it would get better and it simply hasn’t. If anything it’s got worse, therefore I’m not going to wait around for another set of promises to be broken in a few more years. See ya later!
Opportunity Cost is another important concept that focuses not only on what you’re losing by sticking with a bad decision but what you are foregoing by not pursuing better alternatives.
Instead of continuing to work in a career you despise because of external or financial pressures, Opportunity Cost suggests that staying in that career means you miss out on the growth, fulfilment, and potential income from switching to a more promising or fulfilling path. Every day you stay in a dead-end job is a day not spent building skills or relationships that could open better opportunities.
It's not just about the effort you've already put in; it's about what you're not gaining by switching.
Until next time,
Karl (The School of Knowledge).
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