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Series 2, Episode 15: The Sunk Cost Fallacy



Welcome back to the bitesize behaviour podcast and today we look at a behavioural bias called the sunk-cost bias.


OK - so I know I’ve done this, but I wonder if you have too. Have you ever ordered take away food and realised that you’ve over-ordered? Not only have you ordered too much food, even when you’re full up, you continue pilling food into your face because, well - you’ve paid for it, and you can’t throw it away? Yes? No? Just me?


This behaviour is called the sunk cost bias because we struggle to accept that the cost we’ve incurred - buying the take away food - is a cost we can’t get back, it’s a sunk cost, so in order to get our money’s worth, we continue to eat, and eat, and eat!


SHOULD I STAY OR SHOULD I GO?


Another well known example centres around theatre tickets. Say you’ve bought a theatre ticket in advance. The evening of the show arrives, it is horrid weather outside, and you don’t really want to go. You know you’ll be much happier just chilling out at home. However, because the ticket is already paid for, people would rather spend an evening doing something they don’t really want to do than do what they actually want to do, which is stay home in the warm. Why? Because the ticket has been paid for and people would rather do something they don’t want to do, than accept that the price of the ticket is lost, and they can’t get it back. People place the value of the theatre ticket - the sunk cost - above the benefit they would get from being content and happy by staying at home. So, they go to the theatre and don’t really enjoy themselves. But at least the ticket didn’t go to waste, right!?


That’s not to say that we should be wasteful. Please don’t get me wrong. But we should consider the value, the happiness, the contentment you would get from accepting the fact that something else would be of greater value.


This also works, by the way, with other areas outside of money, like time.


If you’re at a bus stop waiting for a bus that’s late, the longer you wait, the harder it is to walk away. You don’t want to accept the sunk cost - the time you’ve waited for the bus - and so you wait, and wait, probably being late, but at least the time you waited for the late bus wasn’t in vain!


QUICK TEST


So - here’s a question for you. Imagine you’ve booked a surprise summer holiday. It is in an amazing place you’ve always wanted to go, and it cost you £500. Without knowing it, your partner has booked a summer holiday for exactly the same week. It’s in an OK place, but it cost £800.


You now need to cancel one of the holidays and you won’t get a refund. Which one would you cancel? Be honest. Would you rather lose the £500 and go somewhere that is OK but cost £800, or lose the £800 and know you’re going somewhere amazing?


It’s an interesting question. Now, according to research, most people decide to opt for losing the £500 and take the more expensive, but less attractive holiday. Losing the £800 is just too much and people would rather have a worse experience knowing they only lost £500 rather than have an amazing holiday knowing they lost £800.


I do love asking these questions because they really get you thinking about what you’d do in a particular situation. Of course the sunk cost bias also works its way into many parts of our lives, into situations where we just continue with a course of action even though we know deep down inside that giving up, and learning from our experience is a much better course of action. And therein lies one of the best tips for overcoming this behaviour. Learning to recognise and accept when it’s time to just move on, especially when it comes to your happiness and overall wellbeing.


THE BIG BUT!


But, and it’s a big but, this is much harder than you might think, mainly because one of the strongest emotions that we have, and the thing we try to avoid as much as we can, is losing.


We talked about loss aversion in Series 2, Episode 6, so if you haven’t listed to that, have a listen back. The food, the theatre ticket, the holiday, all involve us coming to terms with the fact that we have lost something. Money, time... something has to be lost for the sunk cost bias to work.


And this is what we focus all of our attention on, preventing the pain of the loss, instead of considering what else we may gain instead. The power of preventing the loss, our loss aversion, is stupidly strong, which makes walking away from something all the more difficult.


It’s not impossible, but it’s not as simple as saying “Pah.… I’m not bothered about losing that!”.


It's worth remembering that this bias makes it way into our financial decisions too. Imagine a case where you’ve invested money, and the investment you’re in keeps going down, and down, and down. When do you cut your losses and get out of there? This is a difficult decision to make, but one thing is for sure. The longer you stay in, the harder it is to get out.


Knowing when to cut your losses is more art than science. But making the decision to act, to do something, is a first major step in that process.


AND SO...


That’s it for today. In the next episode of Bitesize Behaviours we’ll look at the availability bias. How when making a decision, we give too much attention to the first thing that pops into our heads!


See you next time on bitesize behaviour.

© 2020 Be-IQ Limited / Neil Bage

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