“Marta” had paid $180 for a group of three golf lessons. Being a regular player, however, she developed strong back pain a couple days before her first lesson. Since the schedule was set and the lessons non-refundable, she showed up anyway, in pain. Why?
Welcome to the sunk cost bias. Defying logic, we often stick with a decision when we should not, mostly because we’ve made an emotional and/or resource commitment to it.
Perhaps a classic case is the bride (or groom) who realizes just before the wedding that she (he) is not in love. Gifts have been received, the flowers, photographer and event space have all been paid for and guests are on their way. So the wedding goes ahead and most likely unhappiness with it.
The sunk cost bias shows up in national life as well as in our personal lives. The Vietnam War was failing but leaders, refusing to change course, kept sinking more lives and funding into it. President Nixon’s 1969 statement that “I’m not going to be the first American president to lose a war” is a classic case of sunk costs. The war continued six more years.
The sunk cost bias is enhanced by another mental bias called loss aversion. Research shows we are more unhappy about possible losses than we are pleased by possible gains. Which would upset you more: losing $100 in a poker game or failing to win $100 in a raffle? For most people it’s the former. Loss aversion is why we often take risks to avoid those losses. Throwing more money away at the blackjack table in an effort to break even is the sunk cost bias fueled by loss aversion.
The sunk cost bias can lead to unwise decisions, as in Marta’s case, but it can sometimes be applied to strengthen our commitment to engage in positive behavior. In a study conducted by CVS on incentives for completing a smoking cessation program, participants in Group A were offered an $800 cash reward if they were still not smoking after six months. Those in Group B had to plunk down a $150 deposit to join the program but were told they’d get their deposit back plus $650 if they were still not smoking after six months. Which group do you think did better? While it might seem reasonable to assume that the answer is Group A ($800 would provide more of an incentive than $650 (since the initial $150 deposit the other group would get back was their own money), the success rate for those in Group B was double that of those in Group A. They had sunk their money into it, elevating their commitment to seeing it through. Also, they did not want to lose their $150 – loss aversion.
Research shows that sunk cost behavior can also be sparked by over-optimism, our tendency to believe things are going to turn out well, despite contradictory evidence. We’re also more likely to succumb to sunk costs if we feel the bad outcomes of a decision are more our responsibility than someone else’s. We want to make it right by continuing to sink more into it.
Sunk costs can also be used by others to shape our behavior. Amazon Prime and Costco membership fees lead many to concentrate their shopping in those businesses since “I’ve already paid the membership fee.” We may enjoy doing our shopping this way, so such sunk costs may not feel like a negative. But such consumer “incentive” are designed to gain our loyalty, as are frequent flyer programs too.
The key to benefiting from and avoiding the dangers of sunk costs is to understand our human tendency to stay with decisions and to be able to cast them aside when we should. So, when your gut tells you a decision has or may lock you into behavior you’re not sure is right – listen. You can’t get back the costs you’ve incurred already (for the golf lessons, the wedding, or the war). You can avoid future costs. If you’ve already invested in a business venture that no longer seems promising, think not about what you’ve already spent but about the future costs of hanging in there.
Since the sunk cost bias is a psychological trick we play on ourselves, we can avoid it by getting an outside, objective view before making or sticking with a decision. In 1991, Boston and Massachusetts state authorities who had never mounted such a major project began the “Big Dig” of tunnels and highways to handle traffic congestion. Rather than the estimated cost of $2.8 billion and a completion date of 1998, the “Big Dig” cost $14.8 billion and was not completed until 2007. Had authorities gotten outside, unbiased advice from those who had managed similar projects, they might well have realized what they were up against and avoided or redesigned the project to avoid having to sink more and more into it.
Photo Credit: Jo Valery @ unspalsh.com
