Knowing when to call it quits: the psychology of sunk costs
A couple of weeks ago, my former Facebook colleague, Danielle MacDonald, published a thought-provoking piece on Medium called "What does being finished even mean?". In the blog, she argues that we should redefine "finished" from some external marker of what it means to be done with a task to an internal feeling of being complete. So for example, her fiancé is "finishing" up his Master's Thesis, but what if instead of "finishing" he said, "I'm complete with where I am now and do not need to go any further."?
I was enjoying reading the blog from a rather distanced intellectual perspective until I saw this sentence:
"It’s just that I’ve “finished” too many books I didn’t enjoy, continued to work in places and on tasks that haven’t added much to my life (perhaps they built character?!), languished in places which, quite simply, I should have left a hell of a lot sooner than I did."
To explain why this line caught my attention, let me show you a picture of nightstand from a month ago. All 6 of the books were unfinished. Dear Mr. You and Option B had been collecting dust since this time last year. As part of keeping myself occupied while my wife is away for the summer, I read every night before bed. I realized when reading Danielle's blog that I have been slogging through a few of these books just to say I've finished them. In fact, I finished three from my nightstand -- Dear Mr. You, Hit Refresh, and Designing Your Life -- in the last two weeks. But if I'm honest, only Dear Mr. You was truly an enjoyable read.
What Danielle was alluding to, but did not explicitly name in the quote above, was a classic psychological trap that all humans fall prey to at some point in their life: the sunk cost fallacy. And that is precisely what happened to me with my reading list.
THE SUNK COST FALLACY
Put simply, the sunk cost fallacy is a tendency to continue investing time, money, and other resources in things that are not working simply because of how much time, money, and other resources have already been invested. In fact, the more one has invested in something, the harder it becomes to quit. The problem with this tendency is that there are often very good reasons to "cut your losses."
Sunk costs happen in all facets of life, in big ways and small. On the smaller end of the scale, Danielle and I are not the only people who have slogged through the end of a book just because we've already put a good chunk of time into it. People sit through movies they don't like, especially those they've paid to see. They eat more on their plate at expensive restaurants to "get their money's worth," even if they are full. And they attend events that they no longer want to attend (e.g., an outdoor concert in freezing rain) just because they have already paid for a ticket. On a larger scale, people stay in relationships longer than they should because "we've been together so long." They also stay in academic programs or in careers because of all they have invested to get to where they currently are.
It's not just individuals that fall prey to this. Businesses and governments continue to invest money long after it is clear a project has failed just because of how much money has already been invested.
So, if everyone falls prey to it, what are some of the costs of the sunk cost fallacy? Why does it happen in the first place? And what can people do to avoid it?
What are the costs of the sunk cost fallacy?
The most obvious cost is that the additional time, money, and other resources may not create a return on that investment. Sinking another $2 million into a $100 million dollar project that isn't going as planned may feel like small change to a large corporation, but that $2 million dollars is still gone when the project still ends up a failure.
The larger cost is more hidden, however. People fail to see what was *not* invested in as a result of continuing to invest in a sunk cost. For me, the cost of continuing to slog through a few books I didn't want to finish meant that I postponed starting a few books that I knew I wanted to read. In the grand scheme of things, perhaps that was not a huge cost, and I do have the satisfaction of adding each book to my running "Books Read in 2018" list. But imagine the business that invests $2 million more into something that is not working out as planned. What could have been done with that $2 million in other arenas? Or imagine a PhD student investing two years of their life into a dissertation that ultimately is unrelated to their life's passion, which they could have started pursuing without the PhD two years earlier.
Why do people fall prey to the sunk cost fallacy?
Daniel Kahneman and Amos Tversky famously wrote in their Nobel Prize winning Prospect Theory that "losses loom larger than gains." That is, people feel the pain of a loss much more than they feel joy of an equivalent gain. Losing $100 feels a lot more painful (potentially even two times as much) than winning $100 feels good. People fall prey to sunk costs when they focus more on what they would lose than on what they would gain by quitting. For example, a concert goer may know they will be miserable in the pouring rain, but cannot stand to lose the money they paid for the ticket. What they don't realize is the comfort they would gain by cozying up next to a fire with a cup of hot chocolate instead.
Over-optimism that things "will get better" or that there will be a return on investment.
Prospect Theory also posits that people are willing to take a minimal loss in hopes of a large gain. For instance, a company might be willing to sink $2 million more into a $100 million dollar project in hopes that it will suddenly become a success. In rare circumstances the payoff will come, but more often, if something has not worked so far, the likelihood that added investments will pay off is very low. For example, people might continue watching a tv series that has "jumped the shark" in hopes it will somehow get back on track and the few terrible episodes will have been worth it. Or more worrisome, gamblers who have lost a lot of money might continue to add small amounts to a pot in hopes they will somehow recoup their losses.
Hesitancy to admit waste.
In many cultures and social circles, it is shameful to waste valuable resources. Many of us have heard the mantra from parents of "Clean your plate. There are starving children in Africa." In some cases, people do not want to admit wasting to others (e.g., I don't want to tell my friends that I spent $200 on concert tickets and did not go), and in other cases, people do not want to admit wasting to themselves (e.g., "If I don't go to this concert, it must mean I'm a terribly irresponsible with my money."). The pain of admitting waste is seen as more painful than continuing to do whatever thing they should quit.
Should-ing upon oneself.
I wrote recently about how I was "should-ing upon" myself during a trip to Paris. People often have a long list in their heads, often created by themselves, about what they "should" be doing. "I should finish this book." "I should finish my PhD." "I should stay in this relationship because technically there is nothing wrong." When people are doing something because they believe they "should" do it, they will often not even consider the costs of additional investments because they are going to continue no matter what.
Strategies for avoiding the sunk cost fallacy
Although it is unlikely that a person can completely avoid the sunk cost fallacy in their lives, it is possible to reduce how often one falls prey to it. Here are a few questions I ask myself when I'm considering whether to quit or continue investing in something:
- What benefit will I gain if I continue (or if I finish)? Will that outweigh the cost of continuing?
- If I do not continue (or finish), what could I be doing instead? Is that more beneficial to me?
- What are the costs or the risks of quitting (or of not doing this thing)? Do they outweigh the risks of continuing?
- Am I doing this thing because I think I "should" do it?
- What is the ultimate goal behind what I am doing? Is continuing in line with that goal?
Depending on what I'm considering not finishing, some of these questions are more relevant than others. For instance, there is little (or even no) cost to not finishing a book, so that question isn't really relevant. But there may be a benefit to not finishing the book. Or even a benefit to finishing that makes the pain of slogging through worth it. If I'm considering not doing something that I've already spent money on, I'll likely ask myself what I could be doing instead. Or I'll ask if going is an act of "should-ing upon myself." If I'm considering giving up on something quite major - like a career path - I'll ask myself about what my ultimate goals are and how continuing (vs. not) aligns with those goals.
Sometimes I forget to ask these questions - like in the case of my nightstand books - but I'd like to think that for most major things, I know when to call it quits. In fact, though I didn't realize it at the time, my decision to quit a Masters in Social Work (MSW) program halfway through was based on asking myself all 5 of these questions over the course of several months. I'm happy to say that although I do not have an MSW, I avoided approximately $40,000 in tuition / student loan debt, and had an incredible few years living in San Diego as a result!
Next week will be my 10th blog! I have several ideas for what I might share in the next several weeks, but I'd also love to hear from readers about any topics you would like me to write about. Is there anything from the first set of blogs that you'd like me to go deeper on? Something I haven't written about but you'd like my perspective on? Let me know in the comments!