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In economics and business, a sunk cost is a cost you’ve already incurred that you can’t recover.
If you buy a non-refundable movie ticket, it’s a sunk cost. If you no longer want to see the movie, a logical choice would be not to go to the theater. If you were to go, you’d suffer twice: by losing money spent on the ticket and wasting time you could have spent doing something more enjoyable than watching a movie that doesn’t interest you. If you chose to cut your losses, you’d only lose the money spent on the unwanted movie ticket.
It’s clear that you shouldn’t go. Yet, many people irrationally choose the wrong decision. It’s because of the sunk cost fallacy: the more you invest in something, the harder it is to cut your losses and quit. Another reason is loss aversion — a tendency to prefer avoiding losses more than acquiring equivalent gains.
A person would go see a movie they don’t want to watch because they don’t want to “waste” the ticket. They’d rather waste two hours on a boring movie and fool themselves into thinking that they didn’t lose money on the ticket than lose the money spent on the ticket and gain two hours to do something more enjoyable.
According to some studies, losses produce twice the psychological effect than gains do.[54] This means that you’d work harder to avoid losses than score wins. When coupled with the sunk cost fallacy, you have a recipe for mindless persistence when the only rational decision should be to cut your losses and move on. Monitor your behavior and stop investing further resources in any endeavors where your only motivation is to avoid losses that are in fact sunk costs that you can’t recover.
I shared with you a story in which I hired a business consultant. When I realized that this collaboration wouldn’t work out for me, I quit. Yes, I lost a substantial amount of money, time, and energy. However, if I were to continue, the amount of lost money, time and energy would only increase. Persistence is useless if it leads to waste.
If the only reason why you’re working on a goal is because you’ve already invested so much into it, don’t delude yourself; you’re throwing good money after bad. Think of your prior losses as the cost of learning. It’s time to conclude your education. Quit, reflect, and move on.
1. Persistence is good as long as you care about your objective. If you’re pursuing your goal simply because of sunk costs — costs you’ve already incurred that you can’t get back — you should give up.
2. Consider your losses the cost of learning. When it no longer makes sense to pursue your goal, accept that what you’ve lost was in fact an investment in your education, and it’s now time to conclude it.
