The science of knowing when to cut your losses

I want to share something with you I came across a couple of years ago but I wish I’d discovered sooner.  It’s an idea that comes from economics but one that also applies to the investment of emotional and mental resources too.

I have a track record of sticking with things long after they’ve stopped working for me.  I guess I’ve always believed in sticking things out. While, for the most part, this has served me well over the years, I know at times I have been slow to walk away from arrangements that aren’t working anymore. I’m not alone. We’ve all been guilty of sticking with products, projects and even relationships much longer than we should. So, why do we do it?

The Sunk Cost Fallacy

In economics, a sunk cost is any past cost that has already been paid and cannot be recovered.

For example, let's say you spend £1000 on repairing your car. That money is now gone and cannot be recovered. Now imagine a month later something else goes wrong with your car. The cost is another £700 and now you're wondering if you are throwing good money after bad. Do you repair it?

You might be tempted to think it is better to repair the car again, otherwise all the money you spent so far has been wasted. This makes sense on an emotional level but it makes for poor logic. The money you spent in the past is gone, it's a sunk cost and you can't get it back no matter how to proceed. For that reason, the money you have spent shouldn't factor in any future decision-making process. The logical thing to do is to only consider the potential future costs.

The same goes for your time too. You might go to the cinema and after 30 minutes you realise that the film is terrible. Do you stay to the end?

The logical thing to do is leave because the money spent on the ticket is already gone and can't be recovered. If you stay you won't be any worse off financially but you will waste another hour or so of your time on something you aren't enjoying. Just think about what else you could be doing with that time? Probably something more fun.

What is going on?

It’s all about our perception of loss. Historically, animals that placed more urgency on avoiding threats than they did on maximising opportunities were more likely to pass on their genes. So, over time, the prospect of avoiding losses has become a more powerful motivator on behaviour than the promise of gains. As a result, humans have become hardwired to avoid loss. We are more concerned with protecting what have (or have invested) than we are on focusing on what we would gain instead.

So where else are you falling for the sunk cost fallacy?

Have you ever stayed in a romantic relationship because of everything you’ve been through together, even when you know the relationship isn’t going anywhere? How many weeks, months, years have you lost because of this?

Are you sticking with projects or clients that are no longer rewarding to work with because you don't want to lose the hard work, energy and enthusiasm you’ve already invested? Every day you spend on these projects and clients is a day you could have spent pursuing more rewarding work. What are you missing out on?

Are you still paying for a service you don’t really use because you haven't had your money's worth yet? Even if you never will? Have better products or services since come on the market which meet your needs better?

Which one-way friendships are you holding onto because of all the years you’ve known each other? Is this time that would be better spent with people who give you something back?

So what’s the cure?

Now you know what the sunk cost fallacy is, it doesn’t mean you are immune to it. We are naturally loss-averse creatures. But now that you know about it you can more easily spot it.

Next time you are faced with a decision remind yourself that what you have already invested has gone. If you are not getting any (or little) benefit back, putting more in won't change the situation. Focus on what you could be gaining with that time, money and effort instead

Do you have any good examples of the sunk cost fallacy?

What methods do you use to avoid it? Let me know your experiences below in the comments section or on the Facebook page. 

 

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