The financial psychological mistake that we often make in our sometimes tiring daily life is being trapped in the sunk cost fallacy. This is one type of cognitive bias that is also widely revealed in the science of behavioral economics.
Here are 4 practical examples of the sunk cost fallacy trap, which you may have also experienced.
First example. You’ve bought a cinema ticket to watch a movie. After 45 minutes have passed, you found the film is very boring with a bad plot. But instead of going out, you still watch the film until it’s over. You think that since you’ve already bought the ticket, it’s a shame if you have to leave in the middle of the show.
Next example, you choose to study in a major that many of your friends choose from school. After 2 semesters of college, you feel less comfortable with the major you have chosen. Many of the courses do not match your interests. But you still insist on attending college until you graduate.
“I’ve been in college for 2 semesters and paid a lot of tuition fees, it’s a shame if I have to leave. I chose to continue following it until I graduated, even though I wasn’t really comfortable with this major.”
Last example. There are people who start and run a business. After running for some time, the business was stagnant and did not show significant progress. But instead of stopping his efforts, he still chose to continue to live it even though there were no good prospects in front of him. He said, it’s a shame that he has to stop, because he has invested a lot of money, time and thought to start this business.
Failure to “Move On” Bias
All of the examples above are forms of the sunk cost fallacy. This cognitive bias refers to a person’s failure to “move on” because they feel they have spent money, energy and thought on a previous decision – even though this decision proved to be not good or less than optimal.
Although they later realized that their decision was not accurate, they did not want to move on, because they felt sorry for having already incurred a sunk cost. This cost can be in the form of money, time, thought or energy that has been devoted.
The sunk cost fallacy by behavioral economics researchers is often also referred to as the “escalation of commitment”.
For example, yes, as above. Even though they felt that his college major was not comfortable, they continued until he graduated. Even though he felt his girlfriend was annoying, he still chose to continue the relationship. Even though he feels that his business is stagnant, he continues to live it.
Those are all examples of the commitment escalation trap. The thought of feeling that you have already done something, and that you have already spent money, makes a person even more committed to continuing to do something – even though they are actually aware that something is not quite as expected.
Why Does The Sunk Cost Fallacy Trap Occurred?
One of the main reasons is the possibility that many people are not familiar with the concept of “opportunity cost” or the cost that is lost because we fail to take advantage of other opportunities that exist.
This means: when you continue to dwell on choices that actually prove to be not optimal (for example, continue to watch cinema films that prove to be bad, or continue to study in a department that does not match your interests, or continue to run a business that proves to be stagnant), you actually have wasted an opportunity.
The time you spend going through those old decisions has taken away your chances of success elsewhere. There is an opportunity cost that occurs here.
A person may choose to continue in a relationship with a partner that proves to be annoying, because he feels sorry if he has to break up. Because he feels he has invested energy, time and thought. He chose to continue the relationship in order to avoid feelings of loss.
However, if viewed from the perspective of opportunity cost, his decision to stay in an unpleasant relationship is actually detrimental. Because it means that he completely loses the opportunity to find and find other potential partners who are more optimal and more fun. The time that will be spent to continue the relationship with the annoying boyfriend is a very expensive opportunity cost for him.
Continuing to run a stagnant business is also a very expensive opportunity lost. Because by doing so, he loses time and opportunities to run other businesses that are more profitable.
A number of people are trapped in the sunk cost fallacy because they do not understand the opportunity cost. This person chooses to further increase his commitment to the old choice that was actually wrong for fear of losing. But actually this kind of choice makes him again will experience a fatal loss. He will suffer the loss of opportunity cost (opportunity cost) which is lost in vain.
Hopefully we can all avoid the sunk cost fallacy trap and also avoid the very expensive opportunity lost.
