How do you stop throwing good money after bad?

1 What is the sunk cost fallacy?

The sunk cost fallacy is the tendency to continue an action or a commitment based on the past investments that cannot be recovered, rather than on the current or future benefits or costs. For example, you might keep watching a boring movie because you paid for the ticket, or stay in a toxic relationship because you spent years with your partner, or keep working on a doomed project because you invested a lot of money and effort into it. The sunk cost fallacy can lead you to waste more resources, ignore better alternatives, and miss out on opportunities.

2 Why do we fall for the sunk cost fallacy?

There are several psychological reasons why we fall for the sunk cost fallacy. One of them is loss aversion, which means that we tend to prefer avoiding losses over acquiring gains, and we perceive losses as more painful than gains as pleasurable. Another reason is commitment consistency, which means that we tend to stick to our previous decisions and actions, even if they are irrational or harmful, because we want to appear consistent and avoid cognitive dissonance. A third reason is confirmation bias, which means that we tend to seek and interpret information that confirms our beliefs and expectations, and ignore or dismiss information that contradicts them.

3 How can we spot the sunk cost fallacy?

The first step to overcoming the sunk cost fallacy is to identify it when it arises. To do this, ask yourself some key questions, such as what are the actual benefits and costs of continuing or quitting a certain action or commitment? What alternative options and opportunities might you be missing or ignoring? How would you advise a friend or stranger in the same situation? How would you feel about this decision in a week, a month, or a year from now? Are you basing your decision on past investments that cannot be changed, or on present and future outcomes that can be influenced?

4 How can we overcome the sunk cost fallacy?

To overcome the sunk cost fallacy, the second step is to act on evidence and logic rather than emotions and biases. To do this, set clear and realistic goals and criteria for decisions and actions, evaluate these regularly and objectively, and seek feedback from others. Additionally, learn from mistakes, remain flexible, adaptable and willing to change course if needed, plus celebrate successes and reward yourself for making good decisions.

5 How can we prevent the sunk cost fallacy?

To prevent the sunk cost fallacy from occurring or reduce its frequency and impact, plan ahead and anticipate the risks and challenges that may affect your decisions. Additionally, avoid making impulsive or emotional decisions and take your time to weigh the pros and cons. You should also limit your exposure and attachment to investments that may trigger the fallacy, as well as diversify your portfolio and interests. Developing critical thinking and decision making skills is essential, so practice them regularly. By understanding, recognizing, and overcoming the sunk cost fallacy, you can improve your critical thinking and decision making, as well as avoid throwing good money after bad.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?