Navigating the Iceberg of Decision Making
Ever finish a book you couldn’t stand? Or remain glued to a seat in a movie theater even though the movie you were watching was an insult to cinema. Then you have first-hand experience with the sunk cost effect
Once spent money should no longer influence the future course of action. Because of a desire to avoid appearing wasteful people struggle to approach decision making this way. Instead past spending exerts a meaningful influence on future decisions often leading to sub optimal outcomes.
People naturally feel responsible for past decisions creating a sense of commitment that makes it hard to change course. Leading to further allocations of time, money, or effort to unwarranted causes. Instead of taking a different path people typically double down on the initial course of action.
An example of this is when a loss has been incurred on an investment that has gone down. People are reluctant to lock the loss in and move forward psychologically. Because further losses have little impact on the way they feel. While dumping additional dollars into the investment in an attempt to recoup the losses improves their mood because there is then a chance they’ll get back to even.
When confronted with a choice between a certain loss and a long shot people naturally gravitate to the long shot. This is why bets on long shots at the track are most popular during the last race of the day. Making it the worst time to take a shot with these bets because the odds on these bets go down from the additional funds wagered on them.
Undervaluing Your Time
The sunk cost effect is also pernicious because of opportunity cost. Beyond the monetary consequences people also tend to invest additional time in failed endeavors. So not only is $10 wasted on a movie. An hour of time is lost because of a reluctance to walk out and find something better to do.
So getting back to the track, you end up spending additional time there on an already dark day desperate for your long shots wagers to pay off. Instead of leaving and finding something to do you’d actually enjoy.
This happened to me with Catfish. Apparently the world at large loves this movie given its critical acclaim and the fact it was turned into a TV show. On this particular topic me and the world have a vast difference of opinion. I remember watching the first hour of the movie thinking when is something going to happen. I contemplated walking out but never pulled the trigger. And by the time the end arrived I felt the sweet relief people experience when a seemingly never ending ordeal is finally over.
So not only did I spend money on the ticket. As a victim of the sunk cost effect I missed the chance to walk around the outdoor mall near the theater on a beautiful sunny day. Or otherwise take advantage of the opportunity to be outside engaged in an activity I would have liked.
It’s Not Just Personal
The sunk cost effect impacts organizations as well as people and it is often more costly because of the scale organizations operate at versus individuals. An example would be the stories you always see about charities wasting the money they are supposed to be spending on good causes.
Some of these stories probably do involve misconduct. Oftentimes though it is clear money was not deliberating misspent. The organization had decided upon a course of action and had stuck with it long after it became clear it was not the most effective use of time or money.
Why, because the organization did not want to appear like it was wasting donors’ money or volunteers’ time. So the fear of appearing wasteful turns into a dynamic where actions are taken leading to additional expenditures of time and money. To the point where these activities are then highlighted as wasteful by the media.
Learning to recognize and combat the sunk cost effect in personal decision making will aid you in shaping the choices of the organizations you care about. So they aren’t confronted with a situation like this.
Unplug Your Emotions
The sunk cost effect exerts a powerful influence over judgment because of our need to justify mistakes. This is an emotional need and should not be a concern when deciding on a future course of action. One way to combat it is to disconnect yourself from the decision by pretending someone else made it and now you need to determine the best course of action going forward.
Another possibility is your decision wasn’t a mistake. A change of course is warranted due to changed circumstances. The world changes rapidly and the information used to make a decision can become outdated. Try to keep the words of John Maynard Keynes in mind, “When my information changes, I alter my conclusions.”
Don’t sell yourself cheap either. Incorporate opportunity costs into your decision making. This can aid in crystallizing things to help you make better choices.
So when I was sitting their enduring Catfish. If my thought process included the fact the extra hour of sitting there was worth $25 on top of the $10 I already dropped for a ticket. Maybe it would have been easier for me to get up and walk out, since staying would have then felt more costly based on dollars spent than leaving.
Get reps. Like anything else the more reps you get the more you’ll improve. Try pushing away your plate at a restaurant when full. Not that I take this one seriously myself. It’s a good example of finding something little you can do to get practice resisting the sunk cost effect. So when the stakes are higher you’ve experienced the emotions swirling when the need to walk away arises.
He's published three books. Most recently The World After Covid 19: Coexisting with the Novel Coronavirus.
His musings can be found at stevenlmiller.me. Subscribe to The Pompatus Times for updates.
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