Letting Go of Sunk Costs
How to escape the past
Posted Sep 24, 2014
Do you have a suit or dress in the closet that you haven't worn for years but you are reluctant to get rid of it? You say, “I can’t throw that away because I paid good money for it?” Or you have magazines and books that have been accumulating in your crowded apartment but you won’t discard them because you say, “I’ll get around to them some time when I have the time?” Or you might find yourself in a dead-end relationship but you say, “I can’t give it up because I have already put in three years and I have to make it work out”? You justify “riding a loser” or getting stuck on what you already have because you fear that walking away would mean that you wasted your time or money, you made a mistake, people will now say, “I told you so”, or you will then conclude, “I must be bad at making decisions because this one didn’t work out”. If you recognize any of this in yourself then you are suffering from commitment to sunk costs. You are trying to recover your investment by holding onto it because you cannot accept it is no longer working.
We can think of sunk cost as focusing on the past cost rather than the future utility. You are concerned with what you “paid” for something rather than what you will get out of it in the future. Sunk costs are backward looking decisions. Humans are the only animals who honor sunk costs (Arkes & Ayton, 1999). Laboratory rats may show a burst of activity as they face extinction trials when reinforcements have been eliminated, but they quickly learn to look somewhere else for rewards. Why are rats “smarter” than humans? Or are we too smart for our own good? Unlike the “rational” rat, humans appear condemned to continually reflect on their past decisions, attempting to make “sense” of them and to justify their future decisions by reference to the past. Honoring sunk costs can be explained by loss aversion—you don’t like the idea or feeling of losing (Wilson, Arvai, & Arkes, 2008); commitment theory—you get stuck in a commitment no matter the cost (Kiesler, Nisbett, & Zanna, 1969); cognitive-dissonance theory—you try to make sense or justify a cost by exaggerating the benefits (Festinger, 1957, 1961); prospect theory and loss frames—you frame change as loss rather than gain (Kahneman & Tversky, 1979); fear of wasting—you want to prove that it was not a waste so you stay in hoping things will improve (Arkes, 1996; Arkes & Blumer, 1985); and inaction inertia—it’s easier not to change rather than initiate change, partly because of fear of immediate regret (Gilovich & Medvec, 1994; Gilovich, Medvec, & Chen, 1995). In each case it is the absence of reward that makes this puzzling until we recognize that it is the “interpretation” of change and the “need to explain” the past that keeps us trapped.
Let’s take a closer look at why we get stuck in sunk costs—or, as it is known, “honoring” a sunk cost. There are several reasons. First, we have a fear of wasting. You don’t want to think that you wasted all that time or effort. Consider the following example: I hold up a $100 bill and tell you that I am going to burn it rather than give it to someone or spend it. Your immediate response is outrage.
relationship. Second, we may think that we need to prove that we are right about making our decisions and that giving up a sunk cost will prove that we made a mistake. We fear regret so we ride a loser so that we can hope that things will improve. Third, we may be concerned with how bad we will feel in giving up the sunk cost. We may think that our unhappiness will be so intense that we won’t be able to stand it. Fourth, we may not anticipate the positive opportunities that might follow once we have abandoned a sunk cost. We don’t recognize that new possibilities may open up once we lift the anchor and sail away. And, fifth, we may be overly concerned with how others will view us if we give up a sunk cost, anticipating that they will criticize us, blame us for not giving up earlier or view us as a quitter.
How to Free Yourself from Sunk Costs
In a recent study practicing 15 minutes of mindfulness
meditation was helpful in making a decision to give up on a sunk cost. So, start by stepping back, breathe slowly, watch your breath go in and out, pay attention to your mind, and let go of judgment. Practicing slowing down your thinking is an important step in making good decisions. Once that you have slowed down your thinking you can consider the following:
• If you were deciding again to make that purchase or get into that relationship, would you make the same decision? Why not?
• If you lost that suit or dress, would you go out and buy the same one again? Why not?
• Are you sacrificing other opportunities because you are stuck with the sunk cost? For example, are you giving up the possibility of other relationships or work or studies by sticking with something that is leading nowhere? What is the opportunity cost of your commitment to a past decision?
• Could it be that the benefits of your choice decreased over time while the costs increased? If so, has the tradeoff (costs-benefits) changed?
• Did you not have all the information when you made the initial decision but now-with new information—it is clear that this is not what you expected?
• Are you trying to prove that you are right, even if it keeps you committed to the wrong decision? Is it more important to be right than to be happy?
• If you were observing someone else in the same predicament, would you recommend that they stay with their sunk costs or get out? We are usually much better at giving up sunk costs in advising someone else because we are not trying to justify our own behavior. We are talking about someone else.
• Could abandoning a sunk-cost be the sign of good decision making rather than bad decision making? All of us have made decisions that don’t work out—but a key element in good decision-making is in knowing when to quit.
• Do you admire a good decision maker who has given up on a bad investment? Knowing when to fold is the sign of good poker.
• Are you over-estimating the importance of short-term discomfort in giving up the sunk cost? Is it possible that the initial discomfort will give way to relief?
• Have you given up on sunk costs in the past? Are you glad that you got out while you could? Did anything positive follow from giving up?
Smart people often get stuck with poor decisions that they keep holding onto hoping that they will prove worthwhile in the long-term. I am not suggesting that people whimsically abandon marriages, careers, jobs or even that suit in the closet, but taking a few minutes to examine your commitment to a past decision that seems no longer to be rewarding might help you make a better decision now. Keep in mind that good decisions should point to future benefits. You should not be overly concerned in justifying the past when you can benefit more by moving forward.