How Sunk Costs Can Leave Us Broke And Miserable

A few weeks ago, I was planning on going to a rock concert with a few of my friends. One of my favorite bands was playing and I bought the tickets more than six months in advance. I was really excited…until I got a fever the day of the show.

At first, I was angry. I couldn’t believe my bad luck. I’d been waiting to see this band for more than a year! Plus, I’d already paid for the tickets and it was too late to sell them online. The only way to “recoup my losses” was to go to the concert, no matter how miserable I was feeling.

I decided to call my friends and tell them that I was still in. A few hours later, my buddy drove by to pick me up. Even though I was on the verge of collapse, I stubbornly stuck to my decision.

When we got to the concert, I was miserable. For three hours, I stood in a loud, crowded outdoor venue with thousands of enthusiastic fans. I couldn’t wait to get home. The worst part was that I actually made myself even sicker by standing outside in the cold air for so long. Overall, it was a terrible evening.

Over the next few days, I lay in bed thinking about how I had convinced myself to make such a terrible decision.

Here’s the thing: no matter what I chose to do, there was no way I was getting my money back. The tickets were a sunk cost. Therefore, the money I’d already spent shouldn’t affect my future decisions. It didn’t make sense for me to go to the concert if I wasn’t going to have fun. Instead, the best decision was to stay home and rest.

A sunk cost is basically just a rabbit hole. We wander down it for awhile, hoping that something will come out if it. A few hours later, we figure, hey, we’ve come this far, we might as well keep on going…and thus we dig ourselves even deeper into the ground.

It amazes me how much power a sunk cost can have on our decisions. I spent years studying decisions and was fully aware of the problem; but my knowledge didn’t stop me from making the wrong choice.

Sunk costs are especially dangerous when they affect our business judgment. My friend was recently buying a new car. The sticker price was more than he was willing to pay, but he felt that over time he could negotiate the price a little lower.

Several hours went by. They haggled back and forth, and my friend eventually realized that the seller wasn’t going to lower his price any further. He was ready to walk away, when he suddenly thought, “well, I’ve already put in this much time, so what if it’s a little more than I’m willing to pay?” He bought the car.

Now, it’s one thing if he was actually happy to buy the car at that price. But a few days later, he found a couple of other cars for sale that he would have liked to buy. The problem was that he had taken the “sunk cost” of his time into his analysis, which ended up clouding his judgment.

So how do you fight the sunk cost bias? The key is really to just be aware of the phenomenon. Understand that you’re not getting back the time and money you’ve already put in. Your decisions going forward should always be independent of what you’ve done to that point.

Have you ever made a bad decision because of a sunk cost? What was the result?

3 Responses to “How Sunk Costs Can Leave Us Broke And Miserable”

  1. Allan Ward says:

    Great article. There’s a similar example in some of the behavioral finance case studies I’ve been reading. I bet you’re response would have been different if you hadn’t already bought your ticket but you were planning to buy one at the door!

    I think your last point is key – the way to fight this is to be aware of it.

  2. [...] true. The effort you have already put in is called a Sunk Cost. You aren’t going to get it back whether or not you put in some additional [...]

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