Getting Past the Fallacy of Sunk Costs
The Modern Survival Guide #47
This is the Modern Survival Guide, a guidebook I’m writing for things I think people need to know about living in the modern world. The views expressed here are mine, and mine alone. One of my views is that we often look at certain uses of resources the wrong way — specifically, how we view resources that have already been spent. There’s a logical fallacy here that most of us fall into from time to time, and it. touches. everything.
A Fallacy of “Sunk” Costs
This isn’t a complicated concept, but it is counter-intuitive. In short, the “sunk cost fallacy” is the tendency of people to continue to throw resources at a project because they have already spent (sunk) resources on that project. It’s the error that is made when someone justifies a rash wedding by saying they’ve already bought the dress, or when someone makes another investment in a failing business because they’ve already sunk half their life savings in the company, or when a nation justifies continuing a war because so much blood and treasure has already been spent.
The consequence is, of course, that people continue to expend resources on the proverbial money pit, rather than putting those resources to better use. In this sense, the sunk cost fallacy is really about opportunity costs — rather than spending resources on this failing thing, we should be putting effort into that promising thing.
Sunk cost fallacies are endemic because of a psychological tendency towards loss aversion: we don’t want to “waste” resources, we use hope in substitute for logic, we get caught up in pride, and we don’t want to lose face. This can cause us to do things we don’t want to do just because we’ve already put effort or commitment into those things, and it’s fairly well-documented in both psychology and economics (not to mention history).
Fine, so why is this a survival issue?
Well, think about it — your survival and comfort are in large part dependent on the resources available to you. More precisely, they are dependent on the resources available to you both now and in the long term. And most resources are zero-sum: if you spend them on one thing, they can’t be spent on another. So in that sense making decisions based solely on sunk costs can be a double hit — you can’t spend that money immediately on other, more productive things, and you’re probably hurting your chances of recovering your investment. You survival abilities will suffer proportionally as a result.
And remember, this doesn’t just affect you directly. Companies and nations have the same problems with sunk cost fallacies because, of course, they’re still run by people. This could potentially impact your job prospects, as well as the future of your country.
For example, the F-35 fighter development project will go down in history as one of the greatest sunk-cost fallacies of all time. Over more than a decade of cost overruns, poor design decisions, and fluctuating orders the F-35 program managed to produce a fighter with an estimated cost of more than $406 billion to develop — followed by another estimated $1 trillion in operational costs over the design’s lifespan. It is now one of the most expensive military development projects in history, and has resulted in an arguably low-quality fighter aircraft.
And why did they spend all this time and money on a crap product? Because success was always just around the corner. Because people were too invested in it to see it fail. Because too many careers were on the line. And, frankly, because people were hoping for the Next Big Thing too much to realize they were building the Next Big Lemon.
If that doesn’t seem like it matters much to you, just remember: if you’re a citizen of the US, they spent a whole goddamn mountain of your money on a design that demonstrably sucks, at the opportunity cost of literally anything else we could have done with $400 billion. You could be forgiven for not really being able to visualize $400 billion, so because your author is a considerate soul, here’s what it could have bought.
So yeah. Sunk cost fallacies are all around you, from the highest level of national policy to the most mundane decisions, and they really do affect you.
Beating the Fallacy (I’m Aware That Sounds Dirty)
Sunk cost fallacies are so common because they’re built into human psychology. We are predisposed to value things that we have put effort into, which makes perfect sense most of the time. But the reason we call them sunk cost fallacies is the fact that past resource expenditure is often an insufficient reason to justify future resource obligations.
To that end, beating sunk cost fallacies is all about two things: training and pride. We need more of the first and less of the second.
Training is important because you have to reprogram your mind a little bit when it comes to evaluating the future. Specifically, to get around sunk cost fallacies you have to re-train what you think is important. Because we all instinctively value expended resources but, strictly speaking, resources that already have been sunk into a project are no longer important.
That sounds weird, doesn’t it? It’s tough to internalize this idea but it’s true anyway — resources that have been expended are gone. You don’t get them back. Time, money, effort — whatever it is, if it’s a zero-sum resource and you use it, that’s the end of it. So the value of those resources in that context becomes only what they created. And if what they created isn’t worth a hill of beans, it’s not worth additional investment.
Beating sunk cost fallacies in this sense is about training yourself to look at the future, not the past, to inform your decision-making. The past becomes a guideline, not a source of obligation. The future is the key because how you use your resources going forward is what is important; how you used your resources, less so. Your future resources determine your quality of life (or quality of job, or quality of citizenship, etc.). Your past resources just got you to where you are now. Train yourself to think this way, and you’re halfway home.
The second part of getting over sunk costs concerns pride, and I’m just gonna go ahead and let Marcellus Wallace say this one for me.
“Pride only hurts. It never helps.”
A word or two on pride: It is so tempting to be right all the time. How does any self-help, or historical, or political author start writing things? How does any CEO or politician or social leader get started? Why do we raise monuments? Why do we climb mountains? Hell, why do we even get out of bed in the morning? Pride. So yeah, pride can be a motivator for great things. But when it comes to resource use, pride only hurts, because it is so seductive to be right about our past choices.
And it’s so hard to be wrong. It physically hurts most people to be extremely wrong; you feel the sting in your chest. There’s a hundred thousand years of evolution screaming that you’d better damn well be right, because the last guy who was wrong about tigers (metaphorically, and I guess, literally) didn’t get a chance to reproduce. There’s fifty thousand years of social mores demanding that we make the right choice to keep face with the tribe. And there’s the last ten minutes of having to deal with Janet’s snide remarks about our job quality, which she made right in front of the boss.
Being right is a survival need. It makes sense for us to be invested in our choices most of the time. We have to defend actions, be accountable, and use lessons learned for the future. And the more we’re right, the more pride we develop — because otherwise we’d start believing the next huckster or fool we meet, instead of our own experience. Pride is not an inherently bad thing.
But here’s the thing — pride only hurts long-term decisions. It never helps. You can’t make objective decisions with pride in the ring. The determination to be right that comes with pride can and will blind us to the consequences of our actions, and that includes our resource investments. You’ve got to get past that shit, and as it happens I have a way to do that. It’s called “fail fast.”
This is taking a page from project management methodologies, but basically what it means to fail fast is that instead of setting some kind of nebulous personal intuitive sense around whether or not your actions are successful, you set goals and targets around your resource investments. And if those are breached, you stop investing.
Failing fast works because it takes pride out of the equation by inverting it. It means you get to be right even when you’re wrong. It means you expend enough resources to know whether or not something works, and you get to look like a smart person either way. I can’t stop you from feeling pride; it’s part of being human. But this is a way to channel it in a productive direction.
So What Does This Do for You?
Beating the sunk cost fallacy gives you better control over your life; it’s that simple. It means you’re not making decisions based on pride. It means you’re not devaluing the future based on the past. It means that you make choices based on reality, and don’t let mistakes control you.
Basically it means that you spend a lot less time and a lot less money on things that aren’t helping you. Beating the sunk cost fallacy doesn’t mean that you’re winning at life — but it does mean you don’t spend quite as much time losing.
