The Sunk Cost Fallacy: Sabotaging Your Future by Clinging to the Past

Hello, my friends. Shall we talk about how messed up humans are, including you? Humans are just weird. We have all these weird tricks that our minds play on us, and not one single one of us is ever immune to this kind of stuff. We have little mental shortcuts we take. We have funny little fallacies that we do, and I'm gonna talk to you about one of them today because I think it will be helpful.

I've had conversations with people, in the last week, who are all facing some version of this topic, and so I'm gonna give you a couple of examples and then tell you what it is.

To get hold of me and talk about how I can best help you, go to https://natewalkercoaching.com/contact-1 and share your thoughts, notes, comments, or aspirations in the comments section. Or, DM me on Facebook, etc.  Tell me how I can help you best, and we'll schedule some time together, free of charge, to discuss it. 
 
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Transcript

Podcast 63 - The Sunk Cost Fallacy: Sabotaging Your Future by Clinging to the Past
 

Hello, my friends. Shall we talk about how messed up humans are, including you? Humans are just weird. We have all these weird tricks that our minds play on us, and not one single one of us is ever immune to this kind of stuff. We have little mental shortcuts we take. We have funny little fallacies that we do, and I'm gonna talk to you about one of them today because I think it will be helpful. 

I've had conversations with people, in the last week, who are all facing some version of this topic, and so I'm gonna give you a couple of examples and then tell you what it is.  

Suppose you start a new business, maybe it's an at home business or some new thing you're gonna try and you sink a whole bunch of time and work an effort into it, and you buy the stuff that you're gonna need to do it, and you buy some programs to make it easier to manage, and you buy a new office chair so that you can comfortably sit in front of a camera and do your podcast, and you get a new whiteboard and you spend all of this time writing it all up, and at some point you realize you're not gonna make any money. It's just not gonna work. What do you do? Most of the time people will continue to pursue it because they've already put so much effort into it. It just has to work.  

I had a, a friend who was, one time, building a house, and part way through the building, some of the financing, fell apart. It just kind of collapsed. And now they had a deadline that they were going to have trouble meeting, and a financial commitment that they were going to have trouble reaching. So what were they supposed to do?  

In my conversations with my friend, I said, well, what are you gonna do? You better come up with a plan B. You better figure out what your options are. Even if it means you lose a little bit of money on this property, you'll still be better... I got about that far and he said, "no, no, it just has to work." I said, "well, how are you gonna do that?" "I don't know. We'll just have to make it work."  

Or suppose that you started a new fitness program and realized at some point that neither the diet associated with it, nor the fitness program, was having the effect you wanted it to have on your body, and you weren't going to be able to do it because you travel all the time, or whatever. I'm just making this up. But you get the point.  

And you will be tempted to stick to it because you've already got so much time and energy into it. You've bought all the supplements, you've done all the stuff, you went to the seminars. You've spent an obscene amount of money on gas going back and forth to "nearby city" for the seminars. You can't let this fail.  

Here's another one. I have a friend who has a car that was purchased at a time when that car was worth a whole bunch of money, then got in an accident that was no fault of his, and by the time the insurance did what insurance does and decided what they were going to do and how they're gonna repair the car, and he decided maybe that's not the car he wants ultimately, anyway, he's in a position where he can't ever recover what he paid for the car. So what's the best thing to do? Most of us will stick with that car. They'll say, "well, yeah, but if I sell it, I'll take a loss. I'm not gonna take a loss. I'd take a $4,000 loss. I can't take a $4,000 loss on a $20,000 car. That's ridiculous. So I'll just finish paying for the $20,000 car."  

Yes. But what if you could get one that was more suited to your needs and desires for half that amount of money? Say you found one for $10,000 and you took the $4,000 loss, and five years from now you were in a better situation than you were. Would it be better to stick with the $20,000 car that's now worth less, and lose the money over time or just take the loss right now? 

Here's another example. You go to a movie, and 10 minutes into the movie, you realize that either the content is something you can't stand, or the movie is just stupid and you can't stand it, but you got the Junior Mints, the frozen ones, which if you've never had 'em, are the best. You got the Junior Mints, you got the popcorn, you got the movie tickets, and you got the plush seats. You're out 50 bucks on this movie, so you can't walk away. You gotta watch the rest of the movie. Well, what if it's a terrible movie? What if you don't want to be at the movie? "Well, I'm gonna lose $50." Well, yeah, if you stay and watch the stupid movie, you've lost $50 anyway. It's $50 either way. You just spent two hours and $50. 

Do you want to spend the two hours doing something that is repulsive to you, or do you want to spend the two hours doing something else? You're still out 50 bucks. Take your popcorn and your Junior Mints. Go to a park. Have a nice conversation with your wife or spouse or friend or whomever, and eat the popcorn until you're sick and the junior mints until they're getting on your fingers, and enjoy the time. 

Here's another one. This is something that actually happened to me. So, I was working with a company. I was contracted to do some work to help them identify what the story of their new product really was. And so I had in the room salespeople and marketing people and product managers and product marketers and engineers who had built this and everything else... were all in the room, and I was asking them questions, as I am prone to do.  

If you ever go through a workshop with me, be prepared to answer a lot of questions, because I will push you mercilessly, but kindly. One manager of a department one time referred to my seminars as "the tender lashings of Nate Walker." They will indeed be tender. But I'm gonna push on you a little bit, because solving problems like this that go on in our heads is a really, really important thing. 

So I was with these people going through their story, and here's how the customers see it, here's how they see it, here's what it means, here's what it will do, here's what could happen... and as I began to ask some questions that were a bit more difficult, and that caused them to examine themselves a little more closely, it became evident to all in the room that this product, upon which they had spent millions and millions of dollars, was not a viable product. The manager of the whole thing suddenly sat down on a desk, and with a look of absolute shock on his face, said, "holy crap, we don't even have a product!" That kind of messed with their heads. So you know what they did? They kept pursuing it.  

We're gonna talk about why in just a second.  

Here's another one; the Concord jet. Now some of you are too young to remember what that was. But some of you will remember that it was the first supersonic airliner that could hold a whole bunch of passengers and go, you know, from continent to continent without even having to fuel up. 

It would get there fast was amazing, and it was a disaster, but it was amazing until it was a disaster. So when the Concorde was being built and hundreds of millions of dollars had already been poured into it by not only the maker of the airplane itself, but by several governments... governments were involved in this. They were using taxpayer dollars to fund this thing because the whole idea was that it was going to save the world and, save on fuel and time and everything else, and it was all gonna be great. So everybody and their dog was heavily invested in this, and not long into the project, realized it was gonna be a failure. It was gonna be a big money pit, and it wasn't going to be a viable long-term thing. 

So what did they do? They kept spending company money and government money. Yours and mine. They kept spending that. They launched the Concord. It made several flights. There were a whole bunch of problems with it. They didn't ever make any money. In fact, they never even broke even. And a couple of decades later, the Concord was taken out of the air. It's just no longer a thing. Doesn't exist anymore.  

So why did they keep going? If they were never ever going to recoup what they had spent--- now it's a little easier to spend other people's money, so part of the reason they kept going was, it wasn't coming out of their pocket--- but still, why did they keep going on a project that wasn't going to work? 

Okay, now here's the most dangerous one, but it's worth thinking about. Suppose you sink years and years of time, effort, money, late nights, early mornings, blood, sweat, and tears into a ,relationship, and it becomes evident that the relationship is no longer viable.  

Now, I did say be careful with this. You and I should have a conversation. If you ever get to the point where you think that a relationship is not viable, approach that with extreme caution. But suppose you get to a point where you realize that this relationship, or this company, or this employer, or this person, or this club you belong to, or this organization that you're a part of, suppose that relationship is no longer viable, but you've sunk years and years and years, even decades into it. 

What do you do? Well, you stick with it. At least that's what most people would do.  

So all of these are examples of what's called the sunk cost fallacy. We sink money, time, and energy into something. And because of fear of loss and fear of changing, and fear of giving up on all this work... "we, we worked so hard... I'm not--- I can't let all that work be for nothing." And so we keep going on the same thing that won't work; that's gonna cost more money than it produces, or that's gonna put us in a bad situation down the road, or that's gonna put us in the wrong car, or that's going to put us deeper in debt because of interest payments, or that's going to put us in a position where we have to file for bankruptcy when our house financing, or our lot, or our building project, or our company, or our new venture collapses... we tend to stick with it when we shouldn't. It's called the sunk cost fallacy.  

We're trying to decide based on things that are not really current alternatives. Does that make sense? We're looking back in the past and we're hanging onto all of that work, and we're calling it this big package of stuff that's really important. It was at the time. But it may not even be a viable option right now. We clinging to this big bag of stuff and we say, "yes, but I have to decide, you know, based on, I mean, I have to consider how much work I've put into this." No, you don't. If it's not a current alternative, then you should absolutely not consider it. You should walk away from it.  

We think of all the time and money and work that we sunk into something and we make decisions based upon that, when all of "that" can't be undone. We're trying to turn back the clock and make it un-mean what it now means, or go back in time and make it somehow work out because, "we worked so hard on it." 

Yes. You did. And it's really difficult. It's a really frustrating situation to be in. It can be stressful. It can, it can damage your health. It can make you tired. It can do all kinds of things, but it's not a viable current option. So we have to make decisions based on today and the future. We can't make them based on back then and today and the future. 

Back then is gone. We can't change it. So if we want to make a rational decision--- which we never do, by the way--- humans are not rational beings... if we want to make a rational decision, we have to focus on the present and the future, and those are the only time periods that matter, because they're the ones that we can base decisions on. 

I can say, "okay, looking at my current situation and what I want things to be like in the future. What's the best alternative?" Is it to lose some money on a car? If current and future reality suggests that you'll actually be better off letting go of the car, even if you lose money, lose the money! Don't keep paying for the car you don't want and, and be upside down in it because you don't want to lose three or four grand.  

Let's say you're gonna become a famous singer, and so you take voice lessons and you get your own equipment so you can record yourself, and you have your studio going, and you produce your first album, and you give it to your friends and family and they don't like it. What do you do? Do you see the responses that you get sometimes on shows like... what's it called? America's Got Talent. So you'll have somebody up there, they'll be talking to Simon Cowell for example, and he'll tell them, "yeah, you're not really as good as your friends and family told you when you were growing up." And they just cannot let go of that, partly because it's a dream that they're pursuing. But part of it is the sunk cost fallacy. "I spent years and years and years dreaming about this and planning for this and knowing that this was my path. This was my calling in life." Yeah, actually it's not, so, sorry.  

So what do you do? Pursue it or get some reality?  

So to you, my friends, many of whom I know closely and love, the best recommendation that I can give you is: base your decisions on current reality and future opportunity. Not future fear. Not past frustration. Current reality, and future opportunity. Base your decisions on that.  

The Sunk cost fallacy is also connected to FOMO. You know what FOMO is, right? F O M O. Fear of Missing Out. As humans, we are loss averse, so we will actually put more work into not losing something than in winning or gaining something. That's how people get you to open up a new bank account with a free T-shirt. The free t-shirts are only while supplies last. If you go open a new checking account with them right now, you get a free T-shirt. It would blow your mind what I have seen people do for a free t-shirt. I have actually had computer programmers competing with each other on projects that took hours and hours, days, weeks, even knowing that the winner would get a free T-shirt and, you know, some applause. 

It's amazing what people do. Fear of missing out is another thing. If we say, "yes, but if I let the past go, what am I gonna miss out on that I might have had if I had just persisted 10 minutes longer?" Don't persist 10 minutes longer, if you've persisted 10 years too long.  

That 10 minutes should not be given to your past. It should be given to your present and to future opportunity. Make sense so far?  

Now that we've established that all of us fall prey to sunk cost fallacy at one time or another, or 50 times or another--- all of us do it, how do you not do it? Good question. I'm glad you asked.  

So how would you not fall prey to sunk cost in the car example I gave you? Get a piece of paper out. Write down what kind of car you want, what it would cost, how much money you would lose if you were to sell the one that you have that is now repaired, how much you could get for it, look at what you would lose, and then weigh that against how much interest you would have to pay, how long you would have to drive the car that's not the one you want, what other opportunities it would take away from you, as far as transportation, that you seek. 

Let's say you plan a trip and you get sick. Do you go on the trip and be miserable the whole time? Spend the whole time in the bathroom? Or do you not go on the trip? 

"Yeah, but I was, I already spent 150 bucks on it." Yeah. So sit down and figure out what the best thing is to do right now.  

How about if you've spent a whole bunch of money and time pursuing a major that you now realize you hate, and you'd have no desire to do that for a living? Do you persist and finish that degree so that you didn't waste all of that time? No. You now know that you're going to look at that and say, "oh, I'm falling prey to the sunk cost fallacy. Let me look at current reality and future opportunity. What is the current reality? I've spent this much time in school. What are my opportunities? Well, I could do this, this, or this, or this. Which one will make me happiest five or 10 or 20 years from now?" 

Hanging on to something that is no longer of any value to you, doesn't add value to it, it just means you're dragging around something very, very heavy.  

Now with the relationship example, we have to be a bit more careful. Relationships are an easy thing to get turned around when we're thinking about sunk cost. We can say, "I've put all these years or all this effort into this job, this manager, this spouse, this person, this organization, this whatever, and I feel like it's time to do something different." 

Then that's the time you can say, "okay. Can I learn from the past and applying that and some good help to my current reality, find opportunity in the future for our happiness together? Most of the time, if you're really committed, the answer is yes. You don't bring the past with you. You learn from it. No matter what the situation; your marriage, your job, your movie tickets, your vacation, your car, or anything else, make decisions based on current reality and future opportunity. 

You can learn from the past, but to do so, you've got to let the bad stuff go and bring the good things that you learned along with you.  

You get to choose what that is. It puts you back in the driver's seat. You're not being held hostage by previous decisions or previous circumstances. You're being liberated to decide, "now, what do I want to do?" it's fantastic.  

Now in each of these examples, realize that the sunk cost fallacy is based on emotion. We're always reacting to emotions; fear of loss, fear of missing out, sadness at letting something go, the whole "what if" thing... we're always reacting to emotions. If you want help releasing the negative emotions that make this difficult, call me. Or write to me. You can find me at natewalkercoaching.com. Click on the contact link and tell me how I can help you out. That's what I do. I help organizations change the way they think. I help entire departments, even entire companies, pivot really fast. But I do the same thing with individuals, and I do it based on helping you release the negative emotions that are getting in your way. 

Get some help if you're having trouble making decisions that you think involve the sunk cost fallacy, and I'll tell you that most of them do to some degree.  

When I'm working with clients, especially when I'm doing NLP sessions--- neurolinguistic programming sessions--- one of the exercises that I do at the end is have them go back in time and then visualize moving toward the present and running into situations where there were opportunities available, options that they could have taken, but that they could not see because those negative emotions had gotten in the way. 

It's astonishing the kinds of things that come up. People always have just this, this wealth, this pile, stuff starts just flowing out of their mouth. "Oh, I could have done this. I could have done this. I could have done this. I never thought of this." Well, I'll help you think of it. I want to help you see opportunities that you couldn't see before. Letting go of the sunk cost will free you up to see things you couldn't otherwise see. 

Never let your past hold you hostage. You get to be free right now, and in the future, as long as you choose it. 

We'll talk again soon.