You are falling victim to sunk-cost fallacy. This cognitive bias refers to the act of making future decisions based on past investments. For example, when you have trouble throwing away those old clothes you are thinking to yourself, \u201cwhat a waste to throw away these clothes I\u2019ve spent all this money on,\u201d even though you never wear those clothes anymore and clearing them out would open up space for clothes you actually do wear.\u00a0<\/span>We are the only animals that act in this irrational way – even rats<\/a> are smarter than us and keep looking for rewards in the future rather than dwelling on the past.<\/p>\n Why am I doing this?<\/b><\/p>\n So, why are we falling into this trap? The sunk-cost fallacy is explained by a behavioral economics theory called<\/span><\/p>\n The trap we fall into – just because we have invested in the past, doesn’t mean we should keep investing. prospect theory, which describes how we make decisions when there is risk involved (Kahneman & Tversky, 1979). Within prospect theory, the phenomenon called loss aversion – which means we are willing to give up a lot of potential reward to avoid a chance of a loss – explains why we so easily commit the sunk-cost fallacy. We fear the pain of losing much more than we value the reward of winning (Kahneman & Tversky, 1991). In\u00a0an interview<\/a> with the New York Times, Kahneman explains this with the example of flipping a coin. He proposes the following scenario: if I flip a coin and you get tails, you lose $10. How much money would you need to gain by getting heads in order to commit to the coin toss? Turns out, it\u2019s at least $20, or over double what you would lose by landing on tails. We hate the consequence of losing way more than we value the feeling of winning. <\/span><\/p>\n If we are making these irrational decisions, there must be some reason why, right? A study by Baliga & Ely (2011) found that the sunk-cost fallacy may be a response to our limited memory capacity, meaning that our memory can only hold so much. As new information arrives over time, we may not be able to remember why we started a project in the first place due to our limited memory capacity. The Concorde effect, named for the British and French governments that continued to fund the Concorde aircraft even after it was clear that it was a bust, tells us that investors are more eager to complete a project when the sunk costs are high because they interpret this to mean that at the start of their project, they were optimistic about their future outcomes due to the large amount they invested in the endeavor (Dawkins & Carlisle, 1976). As new information arrives throughout the project\u2019s lifetime, you may not be able to remember all of the reasons you started the project in the first place, but the sunk costs serve as a placeholder for this loss of memory due to our limited capacity. For example, say you are four years into your PhD<\/a> and you aren\u2019t so sure you want to be a professor anymore or why you even started this thing in the first place, the reminder of the cost you put into getting your PhD (years of your life with very low pay) is encoded, or stored in memory, as a mnemonic device to remind you of your original motivation to go through with the PhD. So, while this fallacy just seems like something that tricks us into keeping too many clothes or wasting money on projects, it can also serve a positive purpose by motivating you to trudge through and complete that PhD. Sure, the very rational rat we talked about before may not have made this decision, but while maybe it\u2019s a little irrational, the sunk cost fallacy can help us remember why we started something in the first place and stick to it when times get tough. <\/span><\/p>\n Don\u2019t fall into the trap!<\/b><\/p>\n It’s time to make the decision: to get rid of your old clothes or to pay for a storage unit? https:\/\/www.dreamstime.com\/stock-photo-messy-closet-overfilled-clothes-colorful-woman-hangers-stuffed-any-available-space-image71804965<\/p><\/div>\n But, for those times when we would prefer not to fall victim to the sunk-cost fallacy, how can this be avoided? The core concept to helping avoid this fallacy is metacognition, which means thinking about your thinking. In our decision process to continue or stop a project, we often weigh the cost of a sure loss too greatly and do not give enough weight to viable alternatives (Hafenbrack, Kinias, & Barsade, 2013). Molden & Hui (2011) created a way of thinking about these losses to help us avoid relying too much on prevention-focused motivations, which focus on maintaining a sense of security, and transferring our focus to promotion-focused motivations, which look for alternatives and opportunities for growth. Let\u2019s go back to our original example of deciding whether or not to pay for a storage unit to store all of your old clothes. If we allow our thoughts to be prevention-focused, our decision of whether or not to buy the storage unit will be motivated by our reluctance to give away clothes we have had for so long. Our thinking will be focused on the sure loss of old clothes, and therefore this loss will be weighed heavily in our decision making process. However, if we use metacognition to consciously shift our thoughts from being motivated by prevention to being motivated by promotion, we can think about the positive aspects of getting rid of our old clothes, like saving money on a storage unit and having more room for new clothes. By adopting this form of motivation, we are able to de-escalate our commitment to our past purchases and redirect our focus to the positive outcome that can come from letting go of something that just isn\u2019t working. <\/span><\/p>\n We now know that it is easy to weigh our losses too greatly, so in addition to using metacognition to change our frame of thinking, what else can be done to avoid investing in something that is just not worth it? One study found that participating in mindfulness meditation, which literally means being aware of the present moment we are in, can help us direct our focus to the present and not lament our past decisions (Hafenbrack, Kinias & Barsade, 2013). By doing this we reduce the negative affect associated with giving up on an investment and increase our resistance to the sunk-cost fallacy. For example, if you have purchased a stock that keeps falling, it can be difficult to sell it and gain some of your money back because of the larger amount of money you have already invested in it. By focusing on long, deep breaths entering and leaving your body, instead of focusing on your past investment, you can bring your thoughts to the present to make a smart decision about selling your stock. <\/span><\/p>\n So the next time you are considering adding to an already considerable investment, stop and breathe. Focus on the present and future value of the clothes you are paying to store – or the PhD you need to complete – and you will be more likely to come to a rational decision and avoid the sunk cost fallacy.<\/span><\/p>\n References<\/p>\n Baliga, S., & Ely, J. (2011). Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge. <\/span>American Economic Journal: Microeconomics,<\/span><\/i> 3<\/span><\/i>(4), 35-67. Retrieved from <\/span>http:\/\/www.jstor.org\/stable\/41330450<\/span><\/a><\/p>\n Dawkins, R., and T. R. Carlisle. 1976. “Parental Investment, Mate Desertion and a Fallacy.” Nature, 262(5564): 131-33<\/span><\/p>\n Hafenbrack, A. C., Kinias, Z., & Barsade, S. G. (2014). Debiasing the mind through meditation mindfulness and the sunk-cost bias. <\/span>Psychological Science<\/span><\/i>, <\/span>25<\/span><\/i>(2), 369-376.<\/span><\/p>\n Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. <\/span>Econometrica: Journal of the econometric society<\/span><\/i>, 263-291.<\/span><\/p>\n Molden, D. C., & Hui, C. M. (2011). Promoting de-escalation of commitment a regulatory-focus perspective on sunk costs. <\/span>Psychological Science<\/span><\/i>, <\/span>22<\/span><\/i>(1), 8-12.<\/span><\/p>\n Tversky, A., & Kahneman, D. (1991). Loss Aversion in Riskless Choice: A Reference-Dependent Model. <\/span>The Quarterly Journal of Economics,<\/span><\/i> 106<\/span><\/i>(4), 1039-1061. Retrieved from <\/span>http:\/\/www.jstor.org\/stable\/2937956<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":" The Sunk Cost Fallacy Imagine you have finally graduated from college, gotten a job, and are moving out of your childhood room at home and into a tiny room the size of a closet in the big city. You\u2019re cleaning out and packing up old T-shirts you never wear, sweaters that went out of style […]<\/p>\n","protected":false},"author":5804,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[266316,130416,370833],"tags":[266360],"_links":{"self":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3325"}],"collection":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/users\/5804"}],"replies":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/comments?post=3325"}],"version-history":[{"count":7,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3325\/revisions"}],"predecessor-version":[{"id":3737,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3325\/revisions\/3737"}],"wp:attachment":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/media?parent=3325"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/categories?post=3325"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/tags?post=3325"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"http:\/\/web.colby.edu\/cogblog\/files\/2017\/04\/Sunk-cost-1.jpeg\")
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