Know when to walk away, and know when to run
A sunk cost fallacy is the cognitive bias that occurs when people make decisions based on the amount of money, time, or resources they have already invested in a project; rather than on the potential return or benefit of that investment.
As people and organisations, our tendency to ‘raise when we should fold’ can have significant negative impacts in our personal, professional and political spheres.
In this article, we’ll look at different examples of Sunk Cost Fallacies, from the seemingly harmless to the extremely damaging. We’ll understand the evolutionary biases and behaviours that cause them, and we’ll identify a framework to help you identify and tackle sunk-cost bias in yourself and others.
Throwing good money after bad
Sunk Cost Fallacies can range in scale and impact, from low-impact domestic decisions to geopolitical blunders that can literally kill a million people.
You will recognise at least some of these examples in your own or others’ behaviour;
- Finishing off a meal you’re not enjoying simply because you put a lot of effort into making it.
- Keeping getting your old car repaired even though just buying a newer second-hand one would be less costly and hassle.
- Staying in a job that makes you miserable because you invested time in training and qualifications and you overestimate the personal costs of starting again.
- Staying in an abusive or loveless marriage to try and make it work because you “don’t want to throw those years away.”
- Or, as referenced in the song, keeping gambling when on a losing streak – literally ‘throwing good money after bad’. When it would be better to cut your losses, fold and run!
The classic poor business decision- investing more in a failing business rather than cutting your losses. Examples in business could be:
Decisions based on an emotional attachment:
Borrowing to keep a family concern going rather than ‘selling out’ or not wanting the shame of bankruptcy or failure, even if you know you are unlikely to turn the business around and delaying the inevitable only amplifies it.
Keeping an unprofitable product line
A business may have spent money on developing a product that isn’t that good or isn’t taking off in the market. Still, they feel that they must keep it on sale to try and claw some of the development costs back. If it isn’t profitable, it’s better to stop the line sooner.
Maintaining a low-benefit client.
Keeping up a relationship with a long-term client who is not profitable just because of the time spent on the existing relationship. In revenue terms they might even be a ‘big customer’ – but then, with bulk discounts, they might also give a small or negative profit margin. Even if this customer is a break-even, there is an opportunity cost in not freeing up resources to develop more profitable relationships.
Inflexible Military Strategy
Military decisions that cost millions of lives can sometimes be explained via sunk-cost fallacies. Consider the Battle of the Somme during World War I. The British and French armies launched a massive offensive against the German forces to break through their lines and gain a strategic advantage. Despite suffering heavy casualties and making little progress, Allied commanders persisted in efforts to push forward, unwilling to abandon the offensive and consider alternatives. Some may have felt that if they gave up now, the sacrifices made so far would have ‘been for nothing’, so they sacrificed more. The Battle of the Somme ultimately resulted in over one million casualties.
A more current example is Russia’s invasion of Ukraine. Initially planned to be a short and simple Blitzkrieg, the campaign has turned into a mire and rout, with Russia committing ever more conscripts to the slaughter rather than facing the ignominy of defeat and withdrawal.
The lady’s not for turning.
All politicians want to be seen as competent, decisive & in control – which means their ego places a high cost on U-turns. However, this means they can be blind to spot sunk-cost fallacies where it would be better to take the pain of a u-turn than to keep driving at the cliff.
Instead, they continue to support particular policies even when it is no longer in their best interests, or they have become greatly unpopular.
In the UK we can see this with our two constitutional conundrums of Brexit and Scottish Independence. Brexiteer and Scottish Nationalist politicians are, in many cases, simply trapped in supporting the policies regardless of the consequences or circumstances.
For example, it was clear for some time that there would not be an independence referendum in 2023, but the Scottish Government, having publicly committed to it, continued to spend more time and money on research into a new series of whitepapers. These were of little substance and largely cosmetic but were an opportunity cost in time and resources that could have been spent on, for example, healthcare.
Brexit has been an economic and social disaster. It has yet to produce the promised benefits, created more problems than solved, and the majority of voters think it was a bad idea. But even taking into account that it can’t now be easily undone, the voters and politicians still backing it either personally profit or have simply backed it too publically for too long that they have sunk their reputation into it and changing it might cost them everything.
However according to the university of Birmingham, u-turns in politicians are actually a sign of a strong democracy. The U-turn on their economic plans may have hastened the demise of Chancellor Kwasi Kwarteng, and substitute Prime Minister Liz Truss but that is not a failure of the system. To have continued would have been a sunk-cost-fallacy.
“We should be celebrating the working of a democratic society and appreciating that we have politicians who listen, learn, and eventually decide to reverse a decision. This should be considered a positive rather than a negative feature of the workings of the UK political system.”
Professor John Bryson
Why do we do this to ourselves?
Sunk cost fallacies are highly problematic. They lead to inefficient use of limited resources. They can make people ultimately self-defeating: acting against their own best interests. So why are they so common? The psychology behind them is pretty well understood:
Loss Aversion Bias
For what are no doubt good evolutionarily useful reasons, humans are hard-wired to disprefer a loss over preferring an equivalent gain. Basically, if you lose £100 you will be far more upset than you would be happy if you won £100. If you have already invested years into a campaign, donated hard-earned money, made an effort and bought the t-shirt, then you may feel a deep sense of loss if you abandon it; even if you know it is not, and seems unlikely to, produce the desired results. People overestimate the loss and underestimate the gains from making the change.
Status Quo bias
There is a cognitive cost in correcting. Again likely for good evolutionary reasons; if it’s not causing you immediate physical pain then the cave-person brain says if ‘it ain’t broke, don’t fix it!’
We are creatures of habit, and if you have been doing things a certain way for a long time, you tend to keep doing that – even when there are diminishing, or even negative, returns. Easier to do the familiar on auto-pilot than make an effort to process and act on new information.
Past Decision Consistency
We grow. We learn. We develop our attitudes and understandings – but at the same time we feel a strong ego-centric need to be consistent with our past decisions. Instead of taking each new decision based on the available information, probabilities and merits, we are biased to try and be consistent with past decisions. Part of this is cognitive shortcuts; we feel we have already made a decision so we can just stick with it – and again, there are strong evolutionary advantages to this. It isn’t necessarily a ‘bad thing’ but if we don’t take our own biases into account, it will lead to us making bad decisions.
Pride, Prejudice & Peer Pressure.
Suppose we are changing a privately held opinion. In that case, that will be easier than changing a public one – especially if it is one we have been very vocal about, passionate about, or one that has formed a part of our public persona. There is a barrier of pride to overcome in admitting a mistake.
In situations where there may be a dichotomy – where changing our mind can feel like ‘switching sides’, we may also have to overcome what has been a strong internalised prejudice against the opposing viewpoint.
If we have held a particular view for a time and campaigned on it, we may also have built a circle of like-minded peers. Peer pressure can keep a group on the wrong course, even when a majority of them have silent doubts. We can all needlessly fail together for the sake of not wanting to abandon our friends.
Conflicting Goals & priorities
Where there are institutional decisions or multiple decision-makers, conflicting priorities can lead to sub-par decision-making. If a U-turn would be very damaging to the person in charge, they will try to avoid it even when it would be beneficial to the group as a whole.
This is seen with the “Scottish Ferry Fiasco“, where the Scottish Government has continually chosen to plough hundreds of millions of pounds into Ferries that are now years late, ridiculously over budget and may never even see service.
As long ago as 2019, shipbuilders pointed out that it would literally be cheaper, faster and even deliver a third ferry if we scrapped the two Scottish government-owned rusting hulks and started again from scratch buying ferries of existing designs on the open market.
Avoiding the Sunk Cost Fallacy: How to Identify Risk and Take Steps to Make Better Decisions
A few key signs will help you spot if you, or someone you know, may be committing a sunk cost fallacy. Recognising and dealing with them in both the public and personal sphere helps move us closer to reaching our potential.
Sign 1. Being resistant to change, despite lack of progress.
First and foremost, are you resistant to the idea of abandoning a project or course of action, even when it is clearly not working out? This is where you need to check whether we’ve left the ‘area of dogged persistence’ and passed into the realm of ‘unreasonable stubbornness‘.
We can understand why people don’t like to feel that they have wasted what might be a considerable amount of their life or abandon something in which they have significantly invested their personality or reputation. This can blind people to diminished returns.
Sign 2. Focussing on what it has already cost, over potential benefits.
Are you overly focused on the amount of time, money, or effort that you have already invested in the project rather than on the potential return or benefit of continuing to invest in it? This is a failure of both cost-benefit analysis and of risk-analysis.
- “We can’t just cancel the contract now; we’ve already invested £500 million.”
- “We can’t abandon the cause now; we’ve been campaigning for years”
- “We can’t turn back now, no matter how bad the weather: we are nearly at the top of the mountain.”
You can’t get back the time and money you have already invested. They are already a cost. You need to decide based on future costs to put in, honest probability of success, and likely return on investment, including past costs.
Sign 3. Justification of misjudged past actions.
We all make mistakes, but when someone has a sunk cost fallacy, there is an exaggerated tendency to try and justify past decisions or actions, even if they were clearly wrong or misguided or simply didn’t work out. There are generally four ways this is done:
- “Well, I did my due diligence before investing, and it seemed like a good idea at the time.”
- “In hindsight putting in the extra money didn’t pay off, but I would do the same again because it was the logical choice at the time.”
- “Well, ministers were under pressure to make a decision and were not given all the relevant information.”
- “Well, those decisions were taken before I was in the post, so I can’t be blamed for the consequences.”
- “That wasn’t a bad decision, this losing streak can’t last forever. If I borrow a bit I can win it all back.”
- “The snowstorm isn’t that bad. I’ll be fine if I press on.”
Minimisation of cost/exaggeration of benefit.
- “It’s not really that big a deal; it hasn’t really been a waste as long as we end up delivering something.”
- “It wouldn’t be fair to those who came before us to abandon the progress that they already made.’
These are all attempts to not take responsibility and are signs someone is unwilling to make better decisions by learning from their mistakes.
Recognising a sunk cost fallacy, and taking steps to correct it, can be emotionally painful. It means admitting a mistake and writing off spent costs.
If we want to help someone with a sunk cost fallacy, we need to approach this with empathy. We’ve all done this at some point. It’s a very common bias: it doesn’t mean someone is stupid or gullible – just human.
Here are some techniques.
Focus on the Future
The most effective way for someone to move on is if they can refocus on the present and the future, rather than on the past. Encourage them to consider the potential costs and benefits of continuing to invest in the project, and ask them to at least consider whether there are other options or alternatives that might be more worthwhile.
Return to the “why.”
Going back to the ‘why’ and the values behind the project may be a way that people can realign their efforts in a more efficient way.
For example if someone has donated time and money to Scottish independence primarily with a motivation of not being under a Conservative government, now that it seems clear they will lose the next election, badly, and that independence is not likely to happen, then that goal can better be achieved by shifting support to Labour or the Lib Dems.
In the case of the Scottish ferries, If the project “why” is to get a good deal for the public purse while delivering effective ferry services to our Scottish islands, then the best course of action would be to scrap the current project and simply buy three ferries on the open market. Cheaper. Faster. Sensible. If that is being resisted, someone may have a different ‘why’ – say, protecting their reputation. The question then is – is protecting the reputation by sinking more costs into the project really more important than the ultimate goal of the project?
Cognitive distancing can help us to make better decisions by taking a step back. It might help when discussing the project to get them to picture someone else in a similar situation but with a project that they are not emotionally invested in. For example –
“If you had a friend considering taking out a second mortgage to try and keep a failing business afloat – honestly, what advice would you give them?”
“If a friend had committed years of effort to a lost cause, which you might agree with in principle, but you can see it is holding them back from making more of a difference elsewhere- what advice would you give them?”
Cost Benefit Analysis (CBA)
It can also be helpful to calculate the exact costs people have already sunk into a project and tally it against progress made. They may be shocked if it has been incremental over a long timeocked. This cost benefit analysis exercise is best done with pen and paper.
- Define the project, including its scope, objectives and the “WHY.”
- Make a snap estimate of how much time and money has already been invested in the project.
- Then sit down and try and actually work out the costs. Be honest! Remember to factor in both direct costs, such as donations and wages, and indirect costs – opportunities lost because working on these projects prevented efforts or funding elsewhere.
- What steps would still need to happen for the project to pay back that time and effort and be beneficial?
- How long might that take?
- How much more would that cost?
- How much more time and effort are you willing to commit?
- What is the impact on you if you invest that extra time and money but the project doesn’t succeed or get completed?
- What are the risks – are there scenarios where costs could increase, or the project could be unsuccessful?
This exercise is to quantify the potential dangers of someone continuing to invest in a project that is no longer in their best interest. Suppose there are significant risks which could lead to further losses or negative consequences. In that case, it is better to cut your losses and move on.
Reframe the lost opportunity
Another tactic is to try to reframe the decision in terms of opportunity cost. In other words, you could help the person see that by continuing to invest in the project, they are essentially “giving up” on the opportunity to pursue other, potentially more rewarding options. Given the psychology that humans are more loss averse, this is reframing so they can realise what is being lost by continuing the project.
For example, maintaining a client relationship with negligible profit when new customers might have 20% profit prevents investment in new equipment.
If they have spent time, money and effort campaigning for a political party, but the party remains unsuccessful or, once in office, has not delivered what was promised – then what could they have done with those resources that would still have underlined with their values?
Nobody else can do this for you.
Ultimately, the key to giving up on a sunk cost fallacy is for the person to realise that it is not too late to change course and that there are still other options and opportunities available. By focusing on the present and the future rather than the past, you can help them make more rational and objective decisions that are in their best interests.
When a project is likely to fail, has increased costs, or has lower than expected benefits, then continuing with it is just delaying the inevitable.
Sunk cost fallacies can significantly negatively impact the personal, professional, and political spheres. From continuing to invest in a failing product or unprofitable client to inflexible military strategies and political U-turns: sunk-cost fallacies can lead to poor decision-making and costly mistakes. By recognising and avoiding this cognitive bias, individuals and organisations can make more rational, evidence-based decisions based on their actions’ potential outcomes rather than on the resources they have already invested.
Afterword – Sunk Scot Fallacies
What initially got me thinking about sunk-cost-fallacies was what is a clear example where ‘sunk’ also brings unfortunate connotations. This is – in Scotland, our current ferry government procurement scandal. The procurement of ferries by the Scottish Government has been a disaster: not only are the ferries several years late, but they are several hundred million over budget.
A (very) brief overview
As a brief summary, In 2016, the Scottish Government signed a contract with the shipbuilding company Ferguson Marine Engineering (FME) to build two new ferries for the Caledonian MacBrayne (CalMac) fleet, which operates lifeline ferry services to the islands and remote communities of Scotland. The contract was worth just under £100 million.
However, the project faced significant delays and cost overruns, leading to disputes between the Scottish Government and FME: eventually, the Scottish Government took over the project and placed FME into administration.
In 2019, a full two years after Nicola Sturgeon had ‘launched’ one of the ferries, objections were raised about pouring hundreds of millions more into the project when it was still not clear if, when or how they would be completed.
“You’d be better building from scratch and to a design that’s more suited to what’s needed. They could probably build three smaller vessels for less than £100 million and it would give them more flexibility.” Jim McColl 2019
It should be noted that, four years later as of January 2023 the costs have increased yet again, and the ships are still not launched. If they do launch, they won’t run on the correct fuel for a considerable time, and auditors have found it impossible to account for how hundreds of millions of the budget were spent. The Scottish Government has refused to acknowledge who made critical decisions. No government minister has ever been held accountable. More resources are being thrown after bad, and the end-users get no benefit,
Ferry, Cross the Metaphor
The ferries seem to be a metaphor for this whole sorry business of Scottish independence, which has been like an albatross around the neck of devolution.
When it was suggested: Many people were broadly in favour, at face value, of having the benefits being promised.
The benefits were grossly overstated.
There was no proper plan in place.
Announcements were performative, not practical.
Promises were broken.
Secrecy prevented accountability.
The cost to the taxpayer has skyrocketed.
It’s not yet delivered a single benefit.
…but the Scottish Government still insist it’s beneficial to sink more costs into it.