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Understanding Sunk Cost Bias Can Help You Make Better Decisions

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Sunk cost bias, a pervasive cognitive bias, influences our decisions more than we realise. Rooted in our psychological tendencies, it often leads us to make irrational choices that prioritise past investments over present and future benefits.

What is sunk cost bias?

Sunk cost bias occurs when individuals continue investing in a decision based on prior investments rather than the decision’s current or future value. The term “sunk cost” refers to costs that have already been incurred and cannot be recovered. Economically, these costs should not influence ongoing decision-making since they are independent of future outcomes.But psychologically, people find it challenging to disregard these costs, leading to irrational persistence.

An everyday example of sunk cost bias is continuing to watch a bad film because you’ve already paid for the ticket, even though leaving would free up your time for something more enjoyable. This bias is not limited to trivial situations; it can significantly impact business, personal relationships, and various other life aspects.

The psychological roots of sunk cost bias

Several psychological factors contribute to sunk cost bias. The primary factor is the desire to avoid waste. Humans have an aversion to wastefulness, and abandoning an investment feels like wasting resources. This aversion can lead us to stick with decisions that no longer serve our best interests.

Loss aversion is a concept that Daniel Kahneman and Amos Tversky introduced in their prospect theory as another factor. People tend to prefer avoiding losses over acquiring equivalent gains. The thought of losing the initial investment can be more painful than the potential benefits of moving on, thus reinforcing sunk cost bias.

Sunk cost bias in business and personal life

In business, sunk cost bias can lead to continued investment in failing projects. For instance, a company might continue funding a product development project despite clear signs that it will not be successful, simply because significant resources have already been invested. This behaviour can result in further losses and missed opportunities.

In personal life, sunk cost bias might manifest in staying in an unfulfilling relationship because of the time and emotional energy already invested. While the rational choice might be to end the relationship and seek happiness elsewhere, the bias towards recouping sunk costs can make it difficult to take this step.

Research insights on sunk cost bias

Research has consistently shown the impact of sunk cost bias on decision-making. A 2019 study found that individuals were more likely to continue investing in a failing course of action if they had already invested considerable resources in it. The study showed that both emotional attachment and cognitive dissonance, where people sought to defend their initial choice, were factors in this tendency.

A study published in the journal Psychology and Aging provided evidence that training and awareness could reduce the effects of sunk cost bias. Participants who were educated about the bias and its implications were better able to make rational decisions, disregarding past investments that could not be recovered.

Strategies to overcome sunk cost bias

Overcoming sunk cost bias requires a conscious effort to focus on current and future outcomes rather than past investments. One effective strategy is to adopt a forward-looking perspective. Ask yourself whether the decision makes sense based on current circumstances and future prospects, ignoring past investments.

Another strategy is to set predefined criteria for decision-making. Establish clear benchmarks and outcomes that must be met to continue an investment. If these criteria are not met, it becomes easier to disengage without being swayed by sunk costs.

Seeking external perspectives can also help. Friends, colleagues, or mentors who are not emotionally invested in the decision can provide objective insights, helping to counteract the bias.

The importance of recognising sunk cost bias

Recognising and addressing sunk cost bias is crucial for effective decision-making. By understanding this bias and its psychological roots, we can better navigate decisions in both personal and professional contexts. This awareness can lead to more rational, future-oriented choices, ultimately enhancing our well-being and success.

Remember, the resources invested in the past are gone; what matters is making decisions that will benefit you moving forward. Cultivating this mindset can significantly improve your ability to make sound, unbiased decisions.

Amelia Stone, PsyD is a behavioural psychologist specialising in cognitive biases and decision-making.

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