The sunk cost fallacy is an economic concept with surprising applications in everyday life. From business and investing to sports and shopping, it’s a notion you’ll want to know to make smarter decisions. It isn’t as complicated as many would think. But simplicity isn’t always easy to apply. Understanding the sunk cost fallacy in everyday life is a natural first step towards avoiding it.
We, humans, don’t like admitting we’re wrong. We often end up justifying past wrong decisions by spending more money or time doing the wrong thing, and hoping it eventually turns out to be right. Or we completely ignore the inconvenience or adverse results and carry on.
Let’s define the sunk cost fallacy and proceed with some applications in everyday life.
(Related: The Risk and Return Trade-off Applied in Real Life (Uncommon Examples))
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What is the sunk cost fallacy?
Sunk costs are unrecoverable costs and should be ignored when making decisions. Unrecoverable costs are just as they sound. There’s no recovering them through refunds, reselling, or other similar means.
Are sunk costs relevant for decision-making purposes?
No, they should not be factored in the decision-making process. Regardless if you pursue a course of action or not, sunk costs have been incurred, and worrying about them is a manifestation of human irrationality. In contrast, recoverable costs should factor into your decisions.
The key is to think about a cost’s recoverability or lack of. Can you recoup your costs if you went an alternate route?
Now to the examples. (Forewarning, these might be imperfect examples but I hope the overarching message on unrecoverable costs is clear.)
Business sunk cost fallacies
1. Keeping low-quality employees
From minor violations to grave misconduct, most business owners or managers struggle to let go of low-grade employees. Some hesitate out of pity. But if it’s really because we’d rather not admit the wasted costs of training or the wasted time in building the relationship, then we’re victims of the sunk cost fallacy.
2. Getting a loan you don’t need
Imagine you’re a struggling company in a slowing economy. Banks tighten up and loans are harder to come by. You compile all loan requirements yourself and spend countless trips to the bank, negotiating and paying fees.
The company’s loan is eventually approved but your analyst sees how the market’s changed and you don’t need the loan after all. Most people fall victim to the sunk cost fallacy and avail of the loan anyway, justifying its use with some other project.
3. Large capital expenditure on a losing project
The millions spent on a losing project are sunk costs and shouldn’t matter when considering its future. What really matters is if you objectively see promise in the project’s potential.
But in reality, people tend to consider the millions spent and weigh that in the analysis of the project’s future.
4. Not replacing old and obsolete equipment
Especially when the obsolete equipment was a recent purchase. I’d have a hard time, too.
5. Maintaining an unreliable system
The costs to train employees can be significant. It can be hard to switch systems when you consider the costs and time you’ve spent training on the old system, especially if it’s just marginally unreliable.
Finance and investing sunk cost fallacies
6. Continuing VUL payments even when BTID fits you better
This isn’t a slight on VUL specifically. They’re the convenient and forget-about-it option. But for readers of this blog, those who know smart investing isn’t actually complicated and have the discipline to do it, you probably also know you’re better off buying term insurance and investing the difference (BTID) you would’ve saved from the VUL package.
VUL, quite frankly, benefits an insurance agent more and so is pushed more aggressively. In other words, beginners are likely to have a VUL type of policy. The sunk cost fallacy is when you justify maintaining your VUL by previous payments made. (Granted this is a generalization and an oversimplification. Discuss your options with your agent and know which costs are recoverable and unrecoverable.)
7. Doubling down on a losing stock
Declining stock values can be due to actual proper rationale (e.g., worsening fundamentals) or mere unjustified emotions. It’s right to double down when it’s the latter, but not when a company’s performance and prospects are indeed worse.
The sunk cost fallacy is about buying a stock just (and for no other reason) because it’s cheaper than what you first bought it for.
8. Credit card annual fees
Credit cards aren’t good nor bad. They’re fantastic for the right people but terrible for some.
The sunk cost fallacy is not cutting the credit card, despite the apparent lack of discipline to maintain a credit card in the first place, just because you’ve paid for the annual fees.
Sports, fitness, and health sunk cost fallacies
9. Wet basketball court
Playing on a wet outdoor basketball court, at the risk of injury, because you’ve already made the long trip and everyone’s there.
10. A top draft player plays more minutes
Some playstyles and skillsets don’t translate well to professional leagues. But we often see high-pick players play a lot of minutes, justified or not. You could say it’s a decision that management doesn’t want to regret. (Assuming it turns out to be an awful pick.)
11. Doubling down on cheat day
Strict diets rarely work, and cheat days are encouraged. Here’s a sunk cost fallacy though: “It’s my cheat day anyway, might as well go all-in.” Eating chips doesn’t justify drinking soda. (No judgments here! ‘Chocolates over abs’ if you ask me.)
12. Gym membership
Going to the gym all because you’ve paid for your annual membership fees. Sunk costs aren’t all bad.
Consumption and shopping sunk cost fallacies
13. Smartphone screen protectors
Picture this: You’ve just bought a top-of-the-line smartphone. You also buy the most expensive screen protector available. It’s dark. In fact, too dark! It also covers your camera. It’s trash.
Not wanting to “waste” money, you go on ahead and use the screen protector.
(Shout out to my sister-in-law. Hope you removed the dang thing!)
14. Video game character progression
This is spendings hours on a video game character and realizing a better alternative. I’d rather keep grinding the old character and put the hours invested to good use, but that’s probably a sunk cost fallacy. (I guesss it depends?)
15. Driving to the mall
You’re already at the mall. Why not buy something?
The costs to go to the mall are sunk costs and shouldn’t matter in your decision to buy anything.
16. Shopping spree
You’re already shopping. Might as well buy some more, right?
But this is a common sunk cost fallacy that’s extremely hard to avoid. Shopping momentum is real.
17. Movie or theater ticket
Here’s the often-cited sunk cost fallacy example.
You buy a non-refundable movie ticket a week in advance of the world premiere. On the day of the movie, you get sick. Do you go and watch the movie or stay at home?
The movie ticket is a sunk cost that shouldn’t factor into your decision. Honoring its significance when making your decision is a fallacy.
Life sunk cost fallacies
18. Toxic relationships
Not all sunk cost fallacies in everyday life involve money. Some are driven by large investments in time.
Toxic relationships are an example. They’ve invested too much time to let it fail, even if they’re better off apart.
19. College degree trap
This is trying to finish a college degree that’s seemingly not a fit just because you’ve already finished a semester.
20. Getting married to save face
This was pretty common back in the day. It’s when a couple is forced to get married and avoid society’s criticism of having kids before their vows.
It pretty much sums up the sunk cost fallacy. We shouldn’t right a wrong with another mistake.
21. Any large endeavor
From writing a book to running a business, it’s not hard to imagine the tremendous amount of time you’ll need to put in. Just thinking about the huge time commitment is enough to stop people from even starting.
When you do start, momentum carries you forward to a point of no return. Then you’ll have to finish the task or risk “wasting” the time you’ve already put in.
The sunk cost fallacy can work to your advantage. Use it to trick yourself into valuing unrecoverable costs and have them influence a positive decision.
