The popular A&E television show Hoarders features a range of people struggling with extreme compulsive spending and hoarding behaviors that often impact their living circumstances, relationships, and mental health in a myriad of negative ways. A common pattern that arises during the clean-up phase is the hoarders’ unwillingness to part with items they perceive as having a lot of value, even when those items are clearly broken, useless, or even contaminated. Their rationale for holding onto an excessive amount of items often involves their desire to sell the items, which they paid a lot of money for in the past.
However, most non-collectible items begin depreciating the moment you buy them, even if you never use them or even take them out of the box. Value is also a subjective idea; something you believe to be worth $100 could be seen as a $20 item to someone else, depending on its condition, functionality and original price.
Is the sunk cost fallacy ruining your personal finances?
This brings to mind the fallacy of the “sunk cost,” which refers to how a cost has already been incurred and cannot be recovered. While most of us would never reach the level of stuff accumulation seen on Hoarders, we are more susceptible to the sunk cost fallacy than we may realize. Let’s explore this further and review some strategies for overcoming the sunk cost fallacy in your own personal financial management practices.
What is the Sunk Cost Fallacy?
As described by Behavioral Economics, “Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort).” This means that the sunk cost fallacy not only applies when you hold onto items you no longer have use for but also when you continue investing time and/or money into something simply because you believe you’ve invested too much already to give up now.
The Decision Lab further explains: “The sunk cost fallacy means that we are making irrational decisions because we are factoring in influences other than the current alternatives. The fallacy affects a number of different areas of our lives leading to suboptimal outcomes.”
Examples of the Sunk Cost Fallacy
There are many examples of the sunk cost fallacy in real life, including:
- Continuing to pay for a service you no longer enjoy but you rationalize the ongoing expenditure by focusing on the past (how much time, money and effort you already put into it) instead of critically reflecting on its usefulness to you in the present and future.
- Refusing to part with items you don’t use anymore because you remember how much you paid for them originally and believe you might use them again in the future or you could at least sell them to recoup your expenses.
- Maintaining a paid membership or subscription (e.g., fitness club or streaming channel) that you rarely/never use but are convinced you’ll start using it “eventually” and don’t want to go through the hassle of canceling and signing up again (especially if there are introductory fees involved).
- Sticking with a project or activity that you no longer find fulfillment in because you already invested too much into it to willingly consider alternatives.
- Staying at a job you dislike because you’ve been with the company for a while and believe it may improve and/or you may get a promotion someday because of your loyalty. Alternatively, you may feel anxious about going through the job-hunting process again and potentially landing a job you dislike more than this one; this fear of the unknown convinces you to stick it out in your current position.
How to Avoid the Sunk Cost Fallacy
Chances are, you’ve fallen into the sunk cost fallacy trap at least once in your life. Perhaps you’re thinking about a specific instance as you’re reading this. It’s not something to feel ashamed of – most humans are prone to irrational decision-making quite often – but it does necessitate a solution to avoid wasting even more time, money, resources and space on things that don’t bring value or joy to your life.
To overcome the sunk cost fallacy, begin with a careful reflection on what you’re currently dedicating your time and money to. Imagine someone was forcing you to cut just two things (items, subscriptions, activities, classes, etc.) from what you currently have; what two things would you cut out?
If this thought experiment generates negative feelings for you, examine what those feelings are (anger? Guilt? Shame? Sadness?), why might you feel that way (not getting your money’s worth? Going over budget? Fights with someone over this?), and what alternatives currently exist that may bring more happiness to your life.
As the previously-cited Decision Lab explained, “We should focus on concrete actions instead of the feeling of wastefulness or guilt that accompanies dropping an earlier commitment, as studies have shown that when we are deterred from making decisions based on our emotions, the effects of the sunk cost fallacy are reduced.”
To fully remove your emotional investment from the decision-making process, you could also imagine yourself giving advice to a friend in a similar position as you. Would you recommend they keep investing their time and resources into these items or activities? Or would you point out better alternatives that would be more cost-effective and fulfilling? You’d likely do the latter, so why not apply the same advice to yourself?
The sunk cost fallacy is a common feature in human cognition. Feelings of guilt or regret are unwanted and uncomfortable, but it’s necessary to thoroughly reflect on them if you want to genuinely change your behaviors and make better decisions with a future-oriented focus.
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