We like to think of ourselves as rational beings, and yet we act irrationally in all sorts of ways. One way we act irrationally is with a type of faulty reasoning we use for decisions both large and small, influencing not just the agreements we reach, but also the process we use to reach those agreements.
Sunday morning I woke up in my hotel room near the Rhode Island/Massachusetts border, my dog snoring on the floor next to the bed. My phone chimed with a severe weather alert.
We were due to compete in an indoor dog agility trial that day. Normally, I would have gotten up at 4:00 a.m. and driven down to the Rhode Island trial. But freezing rain was predicted for New Hampshire, so I’d driven down the night before.
My heart sank when I looked at my phone. Freezing rain was now predicted to start soon down here, too. When we’d left home, Rhode Island was only supposed to get rain.
Should I skip the trial and head straight home before the roads became treacherous? I called my husband to see what was happening at home. “It’s already started here,” he said. “What do you think you’re going to do?”
“Well,” I said, “I’ve driven all the way down here. I’ve paid for a hotel room and for the trial. I hate just to turn around and come home after all of that.”
And as those words came out of my mouth, I realized I’d just fallen for the sunk cost fallacy.
The sunk cost fallacy
A fallacy is the use of faulty reasoning.
In economic terms, sunk costs are costs that have already been incurred and can’t be recovered. In psychological terms, sunk costs cause backward-looking decisions, causing us to focus too much on what we spent and too little on future benefit. “Cost” doesn’t mean money alone; it could refer to investment of time, energy, commitment, and so on.
Sunk cost influence shows up all over the place, in daily deliberations both large and small:
- “I hate to let an expensive meal go to waste, so I’ll finish that plate for you.”
- “Those tickets are non-refundable. I don’t feel like going either, but we shouldn’t waste the money.”
- “I’m worried these GPS directions are leading us into the middle of nowhere, but let’s keep going because maybe the main road will be around the next bend.”
- “After putting $35,000 into this kitchen rehab, what’s another $3,000?”
- “I hate my job but I’ve invested so many years to get to this point in my career.”
- “I’ve spent $25,000 and two years of my life fighting that jerk in court. I’m not just going to settle after all that.”
- “He treats me badly but I’ve invested five years in this relationship.”
While there’s one specific circumstance in which sunk cost thinking may have some use, we generally want to avoid the sunk cost fallacy trap.
Why sunk costs are so seductive
Famed behavioral economists like Richard Thaler and Daniel Kahneman link the seduction of sunk costs to loss aversion, our intrinsic tendency to place more emphasis on avoiding losses than on increasing gains. This may well be a result of our evolutionary history, where, as Kahneman has pointed out,
Our natural tendency to place greater emphasis on the potential for loss has become embedded, in a sense, in mental shortcuts we use to make decisions efficiently or quickly.
The impact of sunk costs on good conflict resolution process
I regularly see three instances where the sunk cost fallacy gets in the way of good process. Why care about good process? Because good process increases the odds of good decision making.
1. Forging ahead even when someone has lost command of their emotions
One very common sunk cost mistake I see in difficult conversations is the tendency to forge ahead with the conversation when one or more participants is becoming emotionally swamped or hijacked. The sunk-cost reasoning usually goes, “We agreed to talk about this so we shouldn’t stop now” or “We set aside these three hours to talk and so we should use them.”
It is very difficult for someone who has temporarily lost command of their emotions to get back on their game while still in the midst of the very thing that knocked them off balance — the conversation itself. Instead of hoping for the nearly impossible in the short run, it may be far more effective in the long run to take a break or reschedule.
2. Hurrying when time is running out
Imagine you’ve set aside several hours to sort out a thorny issue and time is running short. With each glance at your watch, you find your sense of urgency increasing, and with it, your desire to push the conversation to fruition. You might find yourself thinking or saying, “We’ve only got 30 minutes left; it’s time to make a decision.”
Time (or the lack of it) can certainly be a conflict resolution tool. Running low on time can encourage a decision from someone who might otherwise choose to avoid making a decision.
But what if you’ve only got 30 minutes left but 90 minutes’ worth of problems to sort out? In those circumstances, hurrying to closure increases the likelihood of a decision or an agreement that isn’t sufficiently considered and may not stand the test of time.
3. Letting scheduling difficulties determine the merits of proceeding
Full plates at work, differing work schedules, and geographically dispersed staff all make scheduling important conversations a real challenge. It’s not wrong to let scheduling be a factor in decisions about whether or not to continue a difficult conversation that is escalating badly or really falling apart. But it is the stuff of sunk cost fallacy to let scheduling unduly influence a decision.
When I see someone worrying about the nuisance of rescheduling and I suspect sunk cost thinking, I sometimes ask,
The power of this question isn’t in the answer, in part because it sets up a false dichotomy. It is possible, after all, to avoid a rescheduling hassle and also reach a high-quality decision. The power of the question is in its ability to uncover sunk cost thinking and raise it up for consideration.
The impact of sunk costs on good conflict resolution decisions
The tyranny of the sunk cost fallacy is that it leads to ineffective decision making. It causes us to put more money on the table than we might otherwise. It causes us to spend more than we might otherwise. It causes us to continue doing things that might be bad for us. Sometimes, it even causes us to stick with personal or business relationships that might not be good for us.
This is not to say that we should end high-priority relationships with abandon or stop spending money on things that give us pleasure or utility.
Here are some ways to free yourself from the tyranny of sunk cost thinking:
1. Just be aware. A few months ago, I happened to explain the sunk cost fallacy to my sister. A few days later she found herself sitting in a doctor’s waiting room for a ridiculously long period of time. When her husband said, “Well, we’ve waited this long, we might as well wait a bit longer,” she immediately recognized it as sunk cost thinking.
2. Ask, “Would I make the same decision if there were no (or fewer) sunk costs?” This is one of my favorite methods for thwarting the influence of sunk costs. Standing in a hotel room with my dog, with freezing rain on the doorstep, safety easily eclipses the cost of a hotel room and agility trial. Once I could ask myself, “If the hotel and agility trial were gratis, would I make the same decision to go ahead and compete today?”
3. Play a mental game with the sunk costs. Mentally go back to the start of the costs and imagine you know what you know now. What would you tell your future self? If you knew that boyfriend or girlfriend would treat you so badly, would you tell your future self to stick with it? If you knew that project would run $50K over budget and still not produce clear results two years later, would you advise your future self to keep pouring money into it?