Picture this: you're at a fancy Las Vegas buffet, enjoying a succulent meal. You get full, but then remember this buffet cost over $100. So you get up and force yourself to grab one more dessert, trying to eek out as much value as you can from your 100 bucks.
At the end of the meal, you're stuffed and a little nauseous. But you say to yourself, "at least I got my money's worth."
Why would you do that to yourself for a measly $100?
It's down to a cognitive bias known as the Sunk Cost Fallacy.
What Is the Sunk Cost Fallacy?
The Sunk Cost Fallacy says that people are likely to keep doing something if they’ve made a big financial or time investment in it. This can be summed up by the saying, “throwing good money after bad." Sunk Cost is a form of Loss Aversion that leads to irrational decision making. Understanding the psychology of Sunk Costs can help us make better day-to-day decisions.
The Sunk Cost Fallacy is a Cognitive Bias, which describes some of the common thinking traps that we can fall into that cloud our decision-making process.
It begins when we have a lot of invested time or invested money in something. This something can be a relationship, business, or even a hobby. Because we have so much invested time in this thing, we are averse to abandoning it. The result is that we invest more money, effort, or time into this thing.
3 Real-World Examples of Sunk Cost at Work
Costco's Membership Fee:
When someone pays a membership fee to shop at Costco, they want to get their money’s worth. They’re likely to buy things they otherwise wouldn’t. Marketing professor Kusum Ailawadi described their behavior this way:
“I’m going to make sure I get my money’s worth [from this membership fee] by shopping in the club store every chance I get.”
The Sunk Cost Fallacy helps drive Costco’s bottom line. A 2017 study found that people who shop at club stores, like Costco, end up visiting the store more frequently and spending more than they would if they weren’t a member.
Panera Bread's unlimited coffee subscription:
Panera, the U.S.-based bakery-café chain, has introduced an unlimited coffee subscription. Called Unlimited Sip Club, the program gives customers unlimited hot coffee, iced coffee, or hot tea for $199 a year (or $8.99 a month).
When that $8.99 that leaves customers’ bank accounts each month it has a powerful effect on their behavior. When deciding where to go for their morning coffee, people are more likely to choose Panera because they’re afraid to not get their "moneys worth."
3. The Concorde Fallacy
Concorde was a line of supersonic jets that boasted a luxury experience and ultra-fast travel times. However, the Concorde did not have the success it hoped for. Instead of cutting their losses, the British and French governments continued to fund the project.
This example of the Sunk Cost Fallacy at work is so famous that it got it's very own name: "The Concorde Fallacy."
How To Avoid (or Leverage) the Sunk Cost Fallacy
Like many things in life, we can avoid the Sunk Cost Fallacy with some self-reflection. When making decisions, we need to take a step back and ask "why." Are we making a rational decision, or are we scared of losing the time and money we've spent on it?
For example, maybe you decide to move to another country for a job. You cross the Atlantic with high hopes for the future and spend thousands of dollars on the move. But after a few weeks it becomes clear that the company you've flown halfway across the world to join has a terrible culture. You're soon abused by your new management and bullied by your co-workers.
You've taken such a big risk and spent so much time and money that you might consider staying to make the move "worth it." If you thought about your situation objectively, you might find more happiness if you cut your losses and flew back home. But if sunk cost has kicked in and you don't recognize it, you might put up with abuse for longer than you should.
But the Sunk Cost Fallacy can also work to our benefit (if we know how to trick ourselves a little bit).
For example, you buy an expensive Peloton bike to force yourself to work out more often. Or buy more expensive clothes for the office so you're forced to dress in a more considered way. What matters most is that we recognize the Sunk Cost Fallacy when it rears its head (for good or for bad).