22Mar30 | Why we suck at ignoring the past | Sunk Cost Fallacy

A friend struggled for years in a troubled relationship. His girlfriend bailed on him time and again. Each time, she came back with regret. He explained it to me this way: “I’ve invested so much energy in the relationship, it would be wrong to throw it away.” A classic case of the sunk cost fallacy.

The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy, or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. In these cases the more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.

This irrational behavior is driven by a need for consistency. After all, consistency signals credibility. We don’t want to admit that we once thought differently, that our aspirations might’ve changed, or that we didn’t know what we want.

But this is common because an evolving mind is constantly changing, we’re indulging in new experiences, doing progress & becoming more self-aware. One who doesn’t embrace it will find themselves stuck between past & future, bound to indecision & getting lost.

We find contradictions unbearable. If we decide to cancel a project halfway through, we create a contradiction: We admit that we are mistaken. Carrying on with a meaningless project delays this painful thought and keeps up appearances.

Investors frequently fall victim to the sunk cost fallacy. Often they base their trading decisions on acquisition prices. However the acquisition price should play no role. What counts is the stock’s future performance. Ironically, the more money a share loses, the more investors tend to stick by it.

Of course, there may be good reasons to continue investing in something to get done with it. But beware of doing so for the wrong reasons, such as to justify non-recoverable investments or to save face at the cost of bleeding.

People don’t want to start over, it’s very painful to go back & look for a new path but that maybe the best thing to do. And that’s why when you look at the greatest artists & creators, they have this ability to start over like nobody does. Naval Ravikant sums it up in this snippet:

I referred to this specific podcast time and again because it’s iconic—full episode has 7.7M views on youtube, lots of life lessons in there.

Our brain is a connection machine. We build all judgments with biased lenses and it’s difficult to prevent. Lots of times it works well, other times it leads to costly, even disastrous, errors of judgment.

For example, advertising creates a link between products and emotions. For this reason you will never see Coke alongside a frowning face or a wrinkly body. Coke people are young, beautiful, fun, and they appear in clusters not seen in the real world. In real world though, a Coke is one of the quickest ways to ruin your body.

These false connections are the work of the association bias, and it influences the quality of our decisions on a daily basis.

“We should be careful to get out of an experience only the wisdom that is in it—and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again—and that is well; but also she will never sit down on a cold one anymore.” – Mark Twain

Effort Justification is another form of the sunk cost fallacy: When you put a lot of energy into a task, you tend to overvalue the result. Managers who put weeks of hard work into a strategy proposal will be incapable of appraising it objectively. Designers, copywriters, product developers, or other professionals who overvalue their creations are similarly guilty of this.

In the Art of Thinking Clearly, author Rolf Dobelli discusses an interesting case where MBA schools work their students day & night without rest, often to the point of exhaustion. Regardless of whether the course work proves useful later on, once the students have the MBAs in their bags, they’ll deem the qualification essential for their careers simply because it demanded so much of them. I’d say it’s a classic in the academic world, even several master’s degree & PhD programs render the same result. Industry people think so highly of post-grad programs simply because of the effort that goes into them, although it might not be directly correlated.

Did you notice why IKEA sticks with the do-it-yourself model? Furniture that we assemble ourselves seems more valuable than any expensive designer piece. We compensate for our effort that goes into building it by overvaluing the pieces we build. Google the “IKEA-effect”.

First-hand experiences are like lenses we apply to our vision of the world. With every lens we get more biased, more leaning towards what we know, and more prone to shift focus from the bigger picture. If we don’t stop every now and then, our vision is only getting more hazy, because we’re going through a lot everyday, and it means our judgements are only getting reinforced, but never reset. The more we advance in our professional & personal lives, the more we are programmed to want what’s next on paths we embark on. But how often do we stop?

I’m lately so fond of the concept of “The Bigger Picture”. Because –in a sense– we’re all trying to grasp bigger pictures, there’s this saying “In short-term, you’re as good as your intensity, in long-term, you’re as good as your consistency”. Bigger picture is the reason you’re able to be consistent with anything. Whenever you miss it, things get blurry. In fact I find it unattractive when people mistake a date for another, or a month or a year. Are you really that lost? You can’t remember this happened how many years ago? It makes me feel like time is just passing for them, not labelled, not significant. This is considered a high zoom-level on the big picture scale, which often misses it. Our brains know how to help us faster when we provide them with masterplans, high-level views, i.e The Bigger Picture.

Next time whenever you have invested a lot of time or thought or effort into something, stand back, examine the result, and think about its future & benefits rather than its cost.