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The Hard Part About Accepting Sunken Costs – MoreRants

Your fear of loss leads to a fallacy that in the business world is referred to as the sunk cost fallacy.

In Daniel Kahneman’s book, Thinking Fast and Slow, he writes in detail about how he uncovered an imbalance between losses and gains we hold in our mind. Kahneman writes that since all decisions involve uncertainty about the future the brain we use to make decisions has evolved an unconscious system for judging how to proceed when a potential for loss arises. This is where sunken costs come into play.

Sunk costs are time or money we’ve invested and we can’t get back. They are gone. But, we forget they are gone and we hold on tight to the fact we invested, either time or money. That’s the fallacy.

Seth Godin has a great example of this. He saw a sign on his neighbour’s front lawn promoting the company that was doing some masonry work on her house. The sign said: Quality Masenry. The most important word was spelled incorrectly! 

Seth inquired with the contractor, “What’s up with your misspelled sign?”

“I spent $1000 on the signs and I still have a few hundred of them left,” the contractor replied. 

Just because the guy spent a lot of money on the signs and still has a lot of them left over doesn’t mean he shouldn’t spend some extra money to get signs with his profession spelled correctly. The $1000 is a sunk cost. The amount he already sent is irrelevant. What actually matters, is the benefit of spelling ‘masonry’ correctly.

It doesn’t matter that you spent 11 hours researching a family vacation to Puerto Rico and now, because of the hurricane you shouldn’t go. Those 11 hours are gone. Your fear of loss leads you to worry about it, when you just need to move on to planning a trip to Cabo.
There’s an imbalance between losses and gains in your mind. So over time, the prospect of losses has become a more powerful motivator on your behaviour than the promise of gains. Whenever possible, you try to avoid losses of any kind and when comparing losses to gains you don’t treat them equally.

So, when it comes to having to make a choice between two options, say printing new signs or researching a new vacation destination, only consider what’s going to happen in the future, not the investments you’ve made in the past. The past investments are over, lost, gone forever. They are irrelevant to the future. They are sunk costs.


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