Have you ever felt trapped or stuck in a commitment, yet insisted to power through when the rational thing to do would be to change course or simply quit? Why is it so hard for us to take a step back?
I set out to write this blog post after reading an article about the fear of quitting, which triggered me to think of the sunk cost fallacy.
After putting 250 words on this page, I exited the document. And yet, I find myself here again because I refuse to change my topic even though I have been unable to make progress. They say a cobbler cannot fix his own shoes - well it’s funny that despite my intellectual awareness and knowledge on the concept, I am still making the irrational decision to continue.
Similarly, I have stayed in jobs and relationships far beyond their expiration dates, spent more money than necessary just because I had a small credit voucher from a store because 1) I am not a quitter. 2) I don’t like to be wasteful. 3) I want to maximize or justify my incurred investment.
As I get more educated in the field of behavioral sciences, I am often excited and relieved to discover terms and scientific explanations to my behavior/ emotions. It gives my experience a name.
In the case of struggling to write, the sunk cost fallacy is when people “continue a behavior or endeavor as a result of previously invested resources (time, money or effort)” (Arkes & Blumer, 1985).
The sunk cost fallacy occurs because our emotions often cause us to deviate from rational decisions. Abandoning an endeavor after committing to it and investing resources into it tends to cause negative feelings of guilt and wastefulness.
Falling prey to the sunk cost fallacy is a psychological trap. When we have invested resources and time but have not yielded the expected result, we double down. Try harder. Invest more.
The problem with that thinking is that we waste more time and more resources trying to correct a past mistake.
The sunk cost fallacy can be associated with several other behavioral biases which can further help put a name to many of our irrational decisions.
1. Commitment bias: where we continue to support our past decisions despite new evidence suggesting that it isn’t the best course of action.
2. Loss aversion: a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing. Simply put, people prefer not to lose $20 than finding $20.
3.Status quo bias: when people prefer things to stay the same by doing nothing or sticking with a previously made decision (Samuelson, & Zeckhauser, 1988). The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss.
Altogether, each of these terms elaborates, from a different angle, why we make irrational decisions, don't want to lose or seek to avoid change.
To further express these cognitive biases, I will provide two examples of the sunk cost fallacy in action- one from research and another from business. Then, I’ll share a few thoughts and recommendations as to how you can avoid giving into the sunk cost fallacy.
While Richard Thaler was the first behavioral scientist to coin the term sunk cost fallacy, Arkes and Blumer expanded on Thaler’s work. The researchers provided discounted seasonal tickets at a theater to see if the money spent on a ticket affected how often people attended the shows.
People either paid the normal price ($15), were given a $2 discount, or were given a $7 discount, but only after indicating that they wanted to buy a seasonal ticket (this showed that they were willing to pay the normal price). Arkes and Blumer then recorded how many shows each individual went to and found that individuals in the no-discount group went to an average of 4.11 shows, compared to 3.32 shows for the individuals in the $2 discount group and 3.29 shows for the individuals in the $7 discount group. Arkes and Blumer concluded the reason for the difference between groups was because the no-discount group had the greatest sunk costs, and therefore continued to invest their time into going to the theater.
Just as how we fall into this fallacy in our everyday life, it is equally important for businesses to take note as it can help understand customer behavior.
To elaborate, the Q team worked with a solar power provider in Africa that offered lease-to-own, clean and affordable solar power to a market of 1.3 billion potential customers.
In looking at their churn, the team uncovered that those who paid a higher down payment when starting the service were less likely to churn over time compared to those who paid a lower fee. The higher down payment made the customer feel they had made a larger investment in the service (sunk cost), thus, that customer group remained more committed to the service.
As a result, our team recommended higher subscription fees as one of our recommendations to help the company increase their customer retention rate.
Chances are, you have your own experience with the sunk cost fallacy, and more likely than not, you can probably think of more than just one.
So, this begs the question–how do we avoid sinking into the sunk cost fallacy?
From experiments to business to life, the sunk cost fallacy creeps into our minds and tries to stop rationality from taking over our thought process. By taking a step back and a moment to really see the bigger picture, you may be able to prevent the sunk cost fallacy from taking hold of you like quicksand.
In the case of business, the Q team can help you to better understand your customers’ behaviors and thought processes by illuminating biases at work. This way, you’ll be able to make more informed business decisions. Find us here should you find yourself seeking actionable insights and behavioral understanding.