in economics situations arise when an
investment has been made and the money
that has been spent will never be
recovered no matter what happens
this is known as a sunk cost many people
stick with various endeavors even though
they don't really want to all while
continuing to hemorrhage time or money
or effort part of it is because they
feel like they made it past the point of
no return this phenomenon becomes a
fallacy when the actions that we have
already made are pushing us to continue
on that path even if it's worse off
which is also known as commitment bias
but the big issue with this is that our
metric for gauging whether something is
worth continuing is often based on the
costs that have already been incurred
instead of looking at whether there is
anything to be gained in the future our
ability to feel safer when we're
sticking to the plan even when it's not
working could also be attributed to
cognitive dissonance where we don't want
to make any changes out of the fear that
all the investment that we've made into
any particular thing could be regretted
or deemed as a grand failure now this
obviously seems irrational when you're
removed from it but when you're in the
thick of it all it's kind of hard to
completely let something go this also
occurs in part due to a phenomenon known
as loss aversion where the impact of
losses feels much worse to us than the
impact of gains and so we're almost
exclusively motivated by the fear of
loss rather than by the pleasure of
success a solid example of this is when
you're gambling at the casino you end up
spending a small amount and losing it
not a big deal you'll keep going and
make up whatever you've lost but you
lose that too and you'll keep going and
going until you're so broke that you'll
tell yourself you'll never go back to
the casino again this is also true in a
case where you're faced with options
let's say you've been scheduled for two
trips one to hawaii for a 300 flight
your dream destination and one to los
angeles for an 800 flight you're more
likely to go to la despite it not being
your dream destination simply because
it's more expensive and you think you'd
be wasting that money otherwise in seth
godin's 2007 bestseller the dip he
discusses the notion of identifying when
to quit on an endeavor many of us
experience phases of resistance and
hardship which he calls the dip with
enough perseverance and work we'd be
able to make it to the other side of the
dip and reap the rewards of success
there are also situations where we hit a
dead end with no positive outcome in
sight this is when it's probably best to
cut your losses and allocate your
resources to something else the key is
to be able to identify and recognize
whether the downturn that you're
experiencing is a dip or a dead end
this effect is not just something that
we experience on an individual level it
also extends to business and government
you tend to see corporations stick to
business strategies that once showed
signs of success several decades ago and
despite the obvious changes in the
marketplace due to technology
advancements and innovations they refuse
to adapt due to a force of habit or the
cost that they've already sunk into
their outdated methods an example of
this would be the reluctance of
businesses to move away from fossil
fuels or carbon gas and instead invest
in solar power and clean energy when the
world is clearly heading in that
direction however money talks so when
you see a company like tesla gain a
greater market cap than every other car
manufacturer combined
maybe that will get you to start
thinking a little differently many
business and economics classes discuss
that any unrecoverable costs sunk in the
past are irrelevant when deciding what
to do next decision makers need to
remember that when sunk costs affect
strategic decisions there can be real
and dire consequences in a 2018 paper on
the sunk cost effect christopher olivola
says that it's healthy to be aware that
what's done is done there's nothing that
can be done to regain the time or money
that you've spent and pursuing something
that makes you unhappy not only isn't
going to get you your money back but
it's also going to make you worse off
you're just digging a deeper hole the
general theory to avoid decision-making
biases is that you need the ability to
recognize the fact that you're in a
situation where you need to override
your instincts or biases when you
develop an awareness of the situation
you'll actually find that the willpower
needed to avoid the sunk cost effect is
not that high so the next time you think
about sticking with a movie just because
you've watched an hour of it or you stay
in that relationship just because you've
invested so much time in it or you don't
quit that job even though it's draining
the life out of you
just take a moment and ask yourself why
you're continuing to do that and whether
maybe just maybe you ought to try to do
something a little different this year
thanks for watching as always drop a
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you next time bye