Beware of Wolf

2022 Advent Calendar of Bad Thinking, Day 9: The Sunk Cost Fallacy

Episode Summary

In which Wolf opens day 9's door... Watch this episode on YouTube: https://youtu.be/F-Tv6hQzyNY

Episode Transcription

Welcome to the Beware of Wolf Advent Calendar of Bad Thinking. To celebrate the holidays, I'm counting down the days until Christmas with a common type of bad thinking each day, described in 60 seconds. This holiday season, give the gift of good thinking by sharing these videos with your friends!

Today is Day 9: "The Sunk Cost Fallacy"

Have you ever been at a restaurant, or maybe a Christmas dinner, eaten until you're full, and then looked at the food still on your plate and think, "I really ought to eat that too."

Or maybe someone has given you a gift they spent money on hoping you'll use it, like a theatre ticket. Even if you don't really want to see the show, you might decide to go just because you don't want to "waste" the money they spent.

These are examples of the sunk cost fallacy: continuing with an activity that no longer has any value or benefit just because some time, energy, or effort has been invested in it. In business, a company may continue to pour money into a failing project, or an investor may double down on a bad investment rather than cutting their losses. This is how we get phrases like, "throwing good money after bad."

The sunk cost fallacy is a kind of emotional trap – we feel obligated to continue with something, even at our detriment.

When you find yourself stuck in the middle of a project, activity or investment and you aren't sure if you should stop or keep going, take a step back and ask yourself: "What's the likely outcome of continuing?" rather than focusing on what has already been invested. Weigh up the expected benefits of continuing against the costs, and if continuing is likely to cost more than any resulting reward, then take a deep breath, and accept that it might be time to cut your losses.

Happy Holidays!