How to avoid the sunk cost trap

Logically fallacious

The New Year has long since been & gone and I’m pleased to report that lifestyles are now improving again here after the usual silly-season hiccups.

Through that time of year it’s all too common to use phrases like ‘I might as well…’ (as in ‘I might as well finish the Christmas cake now I’ve started it’ or ‘I might as well not bother exercising now until mid-February’).

People adopt a similar approach to all kinds of things, from doomed relationships, to over-ordered takeaway curries, watching the second half of an underwhelming movie – or a personal bugbear – persisting with yet another directionless episode of Q&A.

The general theme is ‘I’ve started so I’ll keep going’, despite the diminishing or negative marginal returns.

Cutting your losses

Logically, we should ignore past costs, and only consider future costs & benefits when making decisions, but it’s incredibly difficult to do.

Partly that’s because we don’t value losses the same as potential gains (known as loss aversion) & people can be extraordinarily hard-headed about changing course, even when it’s clearly the rational thing to do.

The British & French governments continued to develop the Concorde, for example, long after it was clear to most partakers that the project would be a commercial disaster & should be scrapped on purely economic grounds.

The so-termed ‘Concorde fallacy’ explains many of life’s bad decisions, & not only those in the field of aeronautical development.

Turn & face the change

The lesson is clear enough: don’t stay too long at the dance.

How, then, can you avoid the sunk cost trap in business and investing? Here are 4 considerations:

(i) Consider only future costs & returns – if you were starting out afresh today, what courses of action would you adopt?;

(ii) Working harder is not always the answer – even if you’ve invested time, energy, & money into a project or investment, you still need to recognise when something isn’t working & it’s time to pull the plug;

(iii) ‘Pride goeth before destruction’ – one of the most poignant Proverbs! Stop caring about what everyone else thinks, & try to be rational!; and

(iv) Take independent advice – advice from friends & family can be conflicting, so if you can’t see the woods for the trees take advice from a trusted & independent third party (ideally one with a licence to deliver it).

Thought-provoking stuff.

Try to learn the difference between a fighting chance and just a chance to fight.