Sunk costs refer to all types of investments in different aspects of our lives that may be deemed as being unrecoverable. They will not be recouped in terms of returns.
Sunk cost fallacy is a cognitive bias where we continue to sink more investments/costs into a project, business, relationship etc in the hope and false belief that there will be a pay-off, somehow.
We do not want to abandon a project or relationship for we are heavily invested even though the current evidence and scheme of things indicate that we are losing.
And so, you continue to hold onto the project, holding the loose end of the stick even though all indications are that the whole thing is sinking. You hope that somehow, anyhow, things will turn out just fine.
Scenario 1
You started a business, built a structure, stocked it and marketed the business. Two years later, the business has not broken even. In fact you continue to pump more funds into the business hoping that it will work out. You take more loans from friends, banks and shylocks in a bid to save the sinking ship. Eventually, all your creditors come knocking, one after the other. You are out of options. You sink into depression. Both family and friends desert you.
Scenario 2
You get into a romantic relationship, invest both your money, emotions, time. You give it your all. Your partner begins to change. You think that you are the cause. To save the relationship or marriage, you become more vulnerable buying even more gifts for your partner, take them to high-end holiday destinations, buy them expensive gifts, in the erroneous belief that they will see your effort and perhaps change their ways. The relationship must work, you gonna fight for what is yours, so you say. You have come from far as a couple. The society is looking upto you. What of your siblings and other relatives?
In fact, you have kids, you have businesses together, you have built a house together, you have joint bank accounts. Your partner continues to mistreat you, gas-lighting you, projecting on you. What you do not realize is that you are in an abusive relationship, a toxic one.
Walking away..
It can be extremely challenging to walk away from a situation where you are invested, where you have put in your money, energy, time, emotions, everything.
You justify and rationalize this by saying that since what is spent cannot be recovered, perhaps you can stay the long course and add some more resources to make things better. And so, you continue staying in a stagnant and perhaps deteriorating situation, wasting valuable resources which could have been invested elsewhere.
It is better to see things for what they are! Money, emotions, energy, time and other resources already spent in unfulfilling ventures cannot be recuperated. It is better to stop wasting more precious scarce resources which could be invested elsewhere productively.
Almost all entities are candidates of the sunk cost fallacy: governments, churches, schools, research institutions, partners in romantic relationships, businesses et al.
But what does subjecting ourselves to the sunk cost fallacy do to us?
Prolonged exposure to this cognitive bias results to wastage of money, time, emotions, nervous breakdown, depression, and eventual death.
How do you detach yourself from this fallacy?
Often, there is always a very thin line in knowing when to say enough is enough and walk away, and staying the course. General rules of the thumb are:
- Recognize that resources once spent and unrecoverable are not helpful. They are just that; zero, nada, loss, waste. Also, know that resources are finite, and that you also have your breaking point.
- That you can always start all over again. Always be ready to walk away. When respect is no longer part of the menu, when losses is the order of business, when quarrels and back-biting is the norm in business partnerships, always be ready to walk away. Anew flourishing business can be started, you will get a new partner, a new project can come up, you can always relocate, a fresh beginning is always possible.
- Peace of mind is extremely important. Nothing equals peace of mind. You can always build anything material but yourself. Do not let yourself reach the breaking point. Know that you cannot change that partner. According to Henry David Thoreau, “things do not change, we change”. You can not really change an adult.
- According Dr. Yalda Safai, “The best predictor of the future or future behavior is the past. If until this point the relationships, hobby, friendship, job, etc. has not served you in any positive regard, it likely won’t in the future.”