Decision Tips
Ignore sunk costs.
Consistency requires you to be as ignorant today as you were a year ago.
—B. Berenson
Nancy Segal, a New York City resident, bought a ticket to the ballet. An hour before she was to leave for the performance, she felt tired and a bit sick. She didn’t feel like walking eight blocks to Lincoln Center or sitting for three hours. What she really wanted to do was put her feet up on the couch and spend the evening reading a book, but she forced herself to go to the ballet. Her explanation? “I spent $120 for that ticket, and I wasn’t about to waste my money.”
Nancy made an irrational decision. She was taken in by the concept of sunk costs. If Nancy had been rational, she would have based her decision only on future consequences. So the amount she paid for the ticket shouldn’t have affected her future decisions. However, she treated the nonrefundable expenditure as equivalent to a current investment. And it’s not. Like Nancy, you’ll make more effective decisions if you consider only future benefits and costs rather than those already incurred.1 Why? Because the decisions you make today can only influence the future. No current decision can correct the past.
A lot of us are sucked in by sunk costs when making decisions. For instance, do you know anyone who just can’t leave food on a plate in a restaurant? I have a friend who, when we eat out, always forces herself to clean her plate even when she’s absolutely full. The fact that the food is already paid for—eaten or not—is irrelevant to her. Have you ever had anyone tell you they’re unhappy in their relationship? If you asked them why they don’t move on, the answer is something like “Because I’ve already put so much time into it.” Or have you ever stayed through a movie you hate rather than walk out because you paid $8 to see it?
In a classic study, one group of subjects was told to imagine themselves as head of a firm that manufactures military defense aircraft.2 The company has already invested $10 million in research to try to build a plane that would not be detected by conventional radar. However, when the project is 90 percent complete, a competitor begins marketing a plane that can go undetected by radar and is much faster and far less costly than the plane their company is developing. As head of the company, subjects were asked if they would invest the last 10 percent of the research funds to finish the project. Then a second group was given the same scenario but no mention was made of the prior investment. Although 85 percent of the first group said they would complete the project, only 17 percent of second group said they would spend the additional money. Clearly, the previous expenditure of $10 million influenced the first group’s decision whether to continue or drop this project.
A study of playing time by NBA basketball players found that coaches are influenced by sunk costs.3 In this instance, sunk costs were defined in terms of selection order in the annual college draft. Although you’d expect rational coaches to play and keep their most productive players, draft order irrationally influenced those decisions. Coaches gave more playing time to their most highly drafted players and retained them longer, even after adjusting for factors such as on-court performance, injuries, and so on.
The common thread through these examples is the consideration of sunk costs. But why do so many of us act irrationally when it comes to ignoring past expenditures of time, money, or effort? Why do we fixate on the past rather than on the future? Because ignoring sunk costs can make us look indecisive, inconsistent, and wasteful.4 We want to save face and avoid admitting, especially in public, that an earlier decision was a mistake. “I’ve got too much invested to quit now” is a phrase many of us have used too often. We also want to appear consistent. This is because consistency is a key element of rationality. Because most advanced societies value consistency and persistence, we want to look good to others, and we can do this by “staying the course.” Finally, many of us desire to avoid appearing wasteful because, in most circles, wastefulness is seen as an undesirable trait.
The decisions you make today influence only the future, not the past. So don’t pay attention to past losses and costs when making decisions.
So how can knowledge of sunk costs help you to make better decisions? First, the decisions you make today influence only the future, not the past. So don’t pay attention to past losses and costs when making decisions.5 That is, ignore sunk costs. In terms of continuing a relationship, for instance, ask yourself, “If I were going out on a date with this person for the first time today, would I want to see him again?”
Second, it’s okay to admit mistakes. If you have trouble conceding errors, ask yourself this: Why does admitting to an earlier mistake distress me? The idea here is to know when to say stop. You want to be able to distinguish those situations where persistence in pursuing a previously set course will pay off and when it’s just misdirected.
Third, consistency isn’t always a desirable trait. Flexibility can also be an asset. It’s all right to be inconsistent if you can objectively justify it. A past decision, made under a certain set of conditions, may no longer be appropriate if those conditions have changed.6 Your previous decision wasn’t necessarily wrong; it just no longer fits the prior conditions it was made under.
Ignore sunk costs.
It’s okay to admit mistakes.
You don’t always have to be consistent.