A friend tells you about a movie you absolutely have to see. You go online, find a time that works, and buy a ticket — non-transferable, nonrefundable, the works. Time passes. As the showing gets closer, another friend throws a dinner party the same night that sounds like more fun. You’ve been at your desk all week, and the idea of sitting still for another two or three hours has lost its shine. A third friend tells you the movie isn’t even that good.
If you go, you’ll spend the evening on something you’re now lukewarm about and miss out on the rest.
If you don’t go, the money is wasted.
What do you do?
Here’s the thing economists will tell you: the moment of waste already happened. It happened when the money left your account. That outlay can’t be recovered — it’s gone. The cost is sunk, and it should play no part in deciding what comes next. The only costs that belong in the decision are the ones still ahead of you. Future choices should be a clean comparison of the current options, with no weight given to what’s already spent. Letting the past expense pull on the decision is exactly the sunk cost fallacy.
We’re all prone to it, at a few levels. The extreme version is continuation bias — the unwise tendency to stick with a plan that’s clearly failing. We can all find examples in our own lives, personal and professional. A close cousin is spending real resources to solve problems that may not exist; smart people burn enormous amounts of time solving things that never needed solving.
And even when we know the logic cold, we can’t quite help ourselves. We’re more or less wired to commit these errors. Underneath, here’s what’s running:
Loss aversion. We tie a future value to a price we already paid, even though the cost is behind us, not ahead.
Framing. How the situation is presented — even how we present it to ourselves — shapes whether we feel a loss or a gain. Call the ticket “wasted money” and we recoil. Call it “long gone, and a chance to make the next few hours better” and the picture changes.
Over-optimism. Once we’ve invested in something, we quietly inflate its odds of paying off.
Personal responsibility. We feel accountable for our past choices, so we defend them.
Not wanting to look wasteful. We throw good money after bad all the time. It’s striking how much the imagined judgment of others — even strangers who hold no such opinion — drives our decisions.
So what’s the takeaway? Notice when you’re doing it. Focus on not over-committing before the decision is made, and once it is, choose based on the best opportunity in front of you right now — the expected return from here forward — regardless of what time or money is already sunk.
Learning to tell the difference between sunk and prospective costs, and deciding from that distinction, is one of the most useful reflexes you can build in business. Good pivots, changes in priorities, the discipline to walk away — they all come from it. We often accuse each other of changing direction too quickly or destabilizing things with shifting priorities. Sometimes that’s fair. But just as often, what looks like instability is actually the healthy thing: focusing on future potential instead of honoring a sunk cost, or worse, riding a continuation bias straight into the ground.
(More on this: https://en.wikipedia.org/wiki/Sunk_cost)
— Brent
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