Today we dig into the concept of “sunk cost” and how it affects our decision-making process.
Sunk cost is a term used in economics that refers to the cost that has already been incurred and cannot be recovered. The sunk cost fallacy is when we continue to invest in something because we have already invested in it, even if it is no longer beneficial.
In this episode, we banter through several examples of the sunk cost fallacy trap for decision-making. We talk about why it is important to recognize when we are making decisions based on sunk costs to instead make decisions based on what is best for us in the present moment.
Listen with us to make decisions that serve you today.
#sunkcost #decisions #decisionmaking #businesspodcast #bestdecisions
Episode 86 Sunk Cost Fallacy
[00:00:00] Welcome to Morning Coffee and Mimosas. I'm Christina. And I'm Joe. We are a father-daughter duo. We come here Sunday mornings, but you can come here anytime you please. We banter about life, about business, and we do it over coffee and mimosas.
Good morning. Good morning, FAJ. You're making me laugh. I know, know. it's a listeners. Good morning to you too. My dad and I have this thing that I've been doing since I was probably, I don't know how old I was, dad, little seven little. I don't, it's something that is really stupid. I just start, I, I'm gesture as if.
talking with my hands, but I'm not actually saying anything. And for as long as I can remember, it just kills my dad, . I don't know why that's so funny. I don't know [00:01:00] why. It's actually not that funny. , but he just, I can't do it. And he can, he cannot not laugh at it. So, And then Christina started doing it during the, uh, opening song monologue or whatever.
And, uh, yes. So I started laughing. So plus I'm very happy, Christina, because you're feeling better. We, we missed the week. Yes. Because, uh, Christina's voice, she didn't feel well and she was sick, but, On top of that, she sounded like the creature from the Black lagoon, which I don't even know what that creature sounds like, but if that creature, I still don't sound normal, but I still don't sound completely normal, but I do sound much better.
Yeah, yeah. We literally, I actually, we were planning on recording virtually because we couldn't see each other in person because, uh, obviously no, he did not wanna get what I had. Um, but. Called him and we were on the phone and he was like, you can't record. And I was like, I mean, I think I, he's like, no one's gonna wanna hear you like this
[00:02:00] He's like, you can't make the listeners listen to you like this. And I was like, oh, that's a very fair point. That's right. That's right. So I'm very happy You're that, you're, you're all better. Yep. Yep. It took a little, took a little bit of time and we, we are still recording virtually this morning just to be safe.
So sorry if the sound isn't as good as usual, we will be back to normal, uh, on our next episode. But for now at least we're able to, uh, we are able to record and we are able to virtually see each other. There you go. So we're. . So yeah, we have a very interesting episode that we wanna present to you today, and this is on a concept called sunk cost fallacy.
And we've done a couple of these, uh, for example, survivorship bias and opportunity cost and things like that. And this has to do with, uh, it's a decision [00:03:00] making. , uh, concept, and it has to do with, uh, a term called sunk cost. And what are sunk cost? Do you wanna define it, Christina, or do you want me to Well, I'm gonna, I'm not gonna give the, um, textbook definition we do, but I think, um, , we, we never do.
But the way that I see the sun cost and, you know, sun cost fallacy, is really, every single day there are things that we're choosing to, you know, um, invest our time, energy, money, whatever it is in. Um, and there are things that we may have already committed a certain amount of investment into, right? So something that, mm-hmm.
we've already spent the money on, we already spent the time on. Um, and what we're gonna talk about today is once you've spent the money, it's the sunk cost. Right, so, so today we're gonna kind of talk about some of the decision making. And this rings [00:04:00] very true to me. I've been doing a lot of purging at home and it rings true to me because there's, uh, a decision that you have to make between whether or not you want to continue to sync time energy.
And in sink investment into a certain thing. And something that I'm trying to keep this top of mind with is things I've already purchased. So as I'm going through my closet and I'm looking through things, there's, you know, dresses I've held up that I used to wear for work often, and I spent a lot of money on them.
And I think, oh gosh, well, you know, I spent so much money on this, I. I can't get rid of that, right? Or this still has the tag on it, but if it's keeping me from, you know, being able to appreciate the other clothes that are in my closet, if it's something that's gonna continue to sit there and it just doesn't suit the lifestyle that I have anymore, because you know, we're not maybe out wearing [00:05:00] dresses as often for work anymore and things like that, then what's the point?
Right? I'm continuing to invest in it, whether it's time and energy or. My piece, right? That instead of getting rid of it. So the idea, the idea of this sun cost fallacy is the decision point where you, you make the call and say, I'm no longer going to continue to sink investment or time or money, energy into this thing.
I'm gonna kind of cut the cord and decide that it was a sunk cost and uh, it no longer serves me. And that's okay. That's it. That's it. And I like the way you, you use. , I'm the opposite. I haven't bought new clothes in 15 years, . So I don't have I buying you new clothes. I get frustrated. , I, I look the same
But that's exactly it. So a sun cost is, you know, it, it's, it's, you know, you've [00:06:00] spent the money and, and think about it. We, we all do this, you know, um, uh, let's say, uh, I'm, I'm funny with this on, uh, maybe watching something on Netflix, you know, or something, and I started. And I'm like, oh, two episodes in, I really don't like it, but I've just wasted like two and a half hours on this show already, so let me just keep going.
Right. Silly stuff. I know these are silly examples, but in business No, but it's true. It's, but it's very true. It's so true. It's so true. And our, and. And when you think about how important and precious time is the, the thought that we would squander our time, we do it all the time. I think that's such a good example show, right?
Where you're kinda like, I don't even enjoy this show anymore, but I felt like I, you know, I committed to, I've, I've actually heard my mom, we've heard mom talk about, uh, I think Grey's Anatomy as an example. She's been watching this show for the better part of. Like 15 plus years, and she's like, I don't even think I enjoy it anymore, but I've [00:07:00] put so much time into it that I have to see it through, and it's like, well, why
Right. And, and you know where, where this becomes more serious, you know, than we're being funny, like your clothes or, uh, you know, watching a show on Netflix or TV or something. Um, the point of this in case listeners, if you're listening and saying, okay, so what's the. The sunk cost fallacy is that when making a decision, sunk cost should not enter into that decision as to what to do next.
So, if you are investing in a business or in a, uh, a new endeavor or new product launch or anything, anything that you are moving forward with time and money. You do all the planning, put it together, and you start down the road. If you, in either your analysis or in real life, it's losing money, [00:08:00] um, people aren't engaged with it, or whatever the rationale is that's making you question that activity.
When you enter decision making mode, you know that you're gonna decide what to do next. The investment in the project of time and money should not enter into your decision as to whether you have you should proceed or not, because that's the fallacy. The fallacy is, yeah, I know it sucks. Everything is bad.
You know, we're not happy with it and we're losing money, but God, we've spent $10,000 and about 200 hours on this. Let's just see it through. Well, what are you seeing through now? You're gonna invest $25,000 and 500 hours you, you follow? . So it simply says, eliminate that sunk cost from your decision making.
And here's where opportunity cost comes in. Opportunity [00:09:00] cost is the cost of what would an alternate decision? What are you losing by not taking an alternate path? And that's what's so, you know, critically important. Don't, um, make your sunk cost part of your decision making aspect. That's such a good way of describing it because, so, and I, I think as leaders too, it's important to make sure that your teams, uh, don't clinging to, you know, well the company.
You know, I signed us up for an investment in this, so I need to make sure that in. , you know, has return , right? Like, making sure that you empower other people to think about it the same way and say like, it doesn't matter if we already invested something. Like every decision should be made on [00:10:00] what's the best decision for us right now.
Correct? Correct. Now if you take, you know, for example, investing, um, you know, people talk about, well, I, I, over the past year I was able to earn a 10. Return on my money, right? Or a 5% or a 15%. Well, that return on your money, just using the same example, may have been some of your stock investments or bond or whatever you invested in might have made 25% and some of them may have lost 15%.
You follow? So if you just look at the losses and go, oh my God, you know, on that investment I lost $15,000. Well, okay, that's true. You did , uh, bad investment. But on these other two investments you made, you made $25,000. You're still up $15,000. You got it. You know, overall, right? Think of that. It, it's a little, at least to me, it's a little clearer to see what a [00:11:00] sunk cost is.
In other words, I've lost 10,000 on this investment. I'm gonna, I'm gonna close it. It doesn't look like it's gonna go anywhere and you continue to look forward. , you don't dwell on it. You don't go, oh my God, 10,000. I could've bought a nice dress. Right? One, one of your, your clothes, that's probably a dress and maybe a pair of shoes for 10 grand.
Yeah. Just . Yeah. Right. Just kidding. Uh, you follow? But we don't, I wish I would, I aspire to have that kind of money that I know a dress is $10,000. Yeah. Shoe. Yes. But we don't think that way in other types of investments like. a business project or, or you know, maybe something you invested in. When I say invested in, maybe you bought some software for your business and you thought, right, this software, it cost you X amount of dollars.
You thought it would work well and now you're realizing for your business it's not really working that well, but. We always say, yeah, but I, I already did this and already invested all this money. [00:12:00] Well, in reality, your decision making should be okay. We blew it. We made a mistake. It doesn't really work.
Let's see what we can find. That's better. And by the way, this also involves personnel. If you've hired somebody mm-hmm. , and yes, you've trained, put money into training and you've put money into. You know that person, but they're not quite turning out the way you wanted. Be wary of the soft, the sunk cost fallacy in that regard.
Also, make your future decision, your decisions for the future based on what's the, what is proper and ignore. The investment unless you can see a way out of it. Yeah. I think this is something that is also, uh, important to consider in relationships even. Mm-hmm. , how often do you hear people talk [00:13:00] about, um, you know, people talk about relationships that are not positive ones in their life.
It could be they're, you know, romantic partners. It could be, you know, a spouse, it could be a, uh, a friendship. And if, if it's really, if there's no, if there's not positives and if it's no longer serving you, sometimes people say, well, you know, we've been friends for so long, so, right. You know, I put up with things that I wouldn't otherwise put up with.
And that same, you know, as you look at your life and you look at, you know, what makes you happy and the people and relationships and things that, um, that enhance your life. , those are decisions that, you know, also take that sunk cost out of things like the time, the time investment, and you know, you could say, If that relationship is bringing negativity instead of positivity, then maybe it doesn't matter how long it's been in place, right?
How long you've been friends and the history that you have, correct. [00:14:00] And, and the, the word maybe is, is what you have to start re not you. I'm just saying. You said that how people Yeah. Right. Think. That's the word. You take out that time investment and you know, oh, they're, you know, my family knows them and we have such history together.
That's your sun cost, your future, your decisions about whether to go in the future. that should not be considered. So what are you considering? So someone may be listening, some of you listening may say, well, my God, that's pretty cold. I mean, if the, if you have a, you know, there's such history and you've been through this and that or whatever, but what is the reason that you're questioning the relationship?
Right? , there's what? That's what your decision making is. Why am I questioning this relationship? Why am I questioning this project? Why am I questioning that software? Why am I, you follow? That's the decision that has to be, that's, that's what has to be included in your [00:15:00] brainstorming and in your decision making process, not the investment of time and money you have.
person in that project, in that, uh, software, in that system, whatever that is and Exactly. Yeah. And, and I think so much of it is, a lot of times we have this gut feeling that something's not right. Mm-hmm. , and you can use the time investment that sunk cost as a, a rationale for why, you know, you keep something right the way that it is.
And I think removing that, you know, if you've got that gut feel, if there's, and if there's something telling you, I would be happier, or, you know, this would work better if I, you know, if I cut this out of my life, this person, this thing, this, you know, whatever it is. Um, , chances are that it's, it's a reason to open your mind to thinking a little bit differently.
And if you've got that gut and, and intuition that's [00:16:00] telling you something isn't right, then , this is a way to start. You know, I think. . Yeah. Maybe it is cold, but at the same time, like as we get older, I think it's life is more and more about you have limited time and you know, you need to start thinking about how you make that, make the most of all that time.
Mm-hmm. that you have mm-hmm. . Right. And, and I like the word I, you know, maybe cuz I like, uh, You know, horror movies or something. But I like the, I like the term sunk cost because if a ship sinks, you don't see it anymore. It's gone. There's nothing you can do about it and you can't get it back. , right. . I mean, yeah, you could yank it up out of the ground somehow or whatever.
What are you gonna do with it? It's gone. And that's what, right, that's why all we're saying is it doesn't mean you're not gonna have a funeral for the ship, for the cost. It doesn't mean you're not going to regret all the time and money you put into it. You're gonna learn from [00:17:00] mistakes. What's that?
You're gonna mourn the loss. You're gonna mourn it, right? And, and you're going to analyze. what mistakes were made so you don't repeat them. But the point is, the fact that you have those costs are not to be entered into when you're making your decision making going forward. That's the key. That's the, that's the element of, uh, of really, of, you know, brilliance in, in the sunco fallacy is, , take it outta the equation.
Now go ahead and figure out what it is you can. Yeah. Without that, what would your decision be? That's correct. And then you can go back and say, okay, well it's still there, but without that, what would your decision be? Closet. Right. I still be depressed. I decision is much easier. Yeah, right. I'm still like, when I'm going through purging my closet and if like, if I'm not thinking about what I spent on things, or the fact that I only wore it once, or the fact that I didn't [00:18:00] wear it at all.
Um, or the fact that somebody gave it to me and it's sentimental. If I'm literally just thinking about that piece of clothing in front of me, I have a lot, much easier time throwing it in a bag and saying somebody else will benefit from this . I mean, you know, we, we do this all the time because most women would be running around with their wedding dress on.
When you think of the sun cost that went into that decision, , yeah. How many visits to the place, the fittings, the money, the whole bit. You'd be like, right. How can I wear this once? I gotta wear this every weekend, every time I go out . Right? So how can I fit into this again? That's right.
So, so that's what, that's what we wanted to cover because this is an I important thing. Do you have any, do you have any dad at your right, at your ripe age? Um, oh boy. Any example?
ripe age at your ripe age. Dad, do you have any examples [00:19:00] of like, when you think back to decisions you made or like, you know, some of the businesses that you've started over the years, is there a time when this was not true in your life and where you kind of like just doubled down on like the wrong things and ended up sinking a lot more?
Sure. You probably should have. Mm-hmm. . . Yeah. I mean, because try to try to expand . Oh, you want, you want an example? I don't know. It's hard for me to, uh, I don't know. Uh, well, I don't know. It's difficult to, difficult to say. Uh, it's okay. You don't have to share. Well, no, no, I'm just, because you kind of hit me, uh, hit me cold with that one and I don't, I don't know.
But I will say that, uh, it. if, if you don't evaluate, sit your current situations, you know, and, and what I mean personally or projects you're working on or [00:20:00] any of those things, you end up rolling along. You know, with that, I, well, I, I'll give you an example because when I. I started a computer consulting company back when I first left, uh, accounting and it, and it was an accounting, it was accounting software.
My, my unique. Selling proposition was that I was, uh, probably the only accountant actually selling accounting software where most of the accounting software was sold by programmers. You know, so a lot of accounting departments at the time were frustrated cuz they didn't really understand accounting. So as, as much as that was a success, and I did, did very well with that, um, as competition came in and as, uh, full, you know, Companies started building fully featured accounting software.
I would say that I stayed with that probably longer than I probably should have. But then I migrated [00:21:00] into, into, um, sales and CRM and things like that. So I, it wasn't something that I probably thought of. It was just as the market changed, I kind of morphed with, you know, with the market. Um, but I may have sa stayed selling accounting software longer than I should have.
I didn't lose any money or anything, but, you know, yeah. , but it's a, you know, it's a good question, but we all have that in. Yeah, I was just thinking, I mean, I, like, I, I think it's easy to, it's easy to think of these examples in the terms of a TV show that you spent too much time watching that you didn't really enjoy anymore or.
you know, in some, like I'm talking about purging my closet, right? All the things that I'm like, okay, I spent money on these things and because of that, I've held onto them and, and now I have a, a surplus issue of I don't have enough space for all of this, right? Mm-hmm. . So it's stealing my peace. And, and this sub cost is, you know, what I spent is [00:22:00] saccr, my piece is sacrificed for these things, right?
Yes. So that's like, . But you know, just thinking through, um, you know, those are, those are kind of like small and well and personal and kind of funny examples. Yeah. But I was just, uh, I can't think of like, I'm, I'm happy I don't have one in my person. My life like relationships. Um, well, uh, here's what I'm gonna say from a business perspective right now, right.
What I will say is that one of the reasons that we lean on Sunquest is because change is sometimes more scary than a present unhappiness, if you want to, if that makes any sense. Um, And, and I don't want to, I don't want to be, so like, it's like your whole life or anything. What I'm just saying, this can be you're unhappy with a project, you're unhappy with a car, you know, Hey, I bought that car, it's a crappy car and it's been a lemon, but [00:23:00] geez, I, I've put in $10,000 into that car, so I gotta make it work.
You know where that's an example of sun cost. If you forget that 10,000, would you go and sell that car and buy another one You follow? If the answer is yes, would you be happier? Because every time you look at that car, you think about the $10,000 you put into it. correct. But it keeps breaking down. I'm getting rid of it.
I'm stuck on the side of the road. We're getting and we're not all like you. Right? I would getting rid of it from the side of the road, but , um, but I dunno if the listeners know that story. This, this is the, this is the issue. We'll have to tell it another time, but this is the issue. Sun cost. Linked to that is fear of change.
Linked to that is comfort in, I can't tell you how many times people say, well yeah, but I'm used to it or I'm used to this or, or eh, it's okay. It is what it is. And you know, things like that about things that they're not necessarily happy with. [00:24:00] And they use sunk cost as a crutch, as a rationale. That's ne.
Correct. Correct. So, yeah, I, I love it. And I, I think we are not suggesting, I think that's a good point, dad. We're not suggesting that you blow up your life. We're not suggesting that all of these things, we are not suggesting that, that there's a lot of things that need to change. But, uh, when you take that inve, that prior investment, the sunk cost out of things, , maybe you'll see that your decisions will be different.
Mm-hmm. . And you'll feel a little bit more empowered to make decisions, um, that serve the life you want in the future rather than the life you had in the past. That's it. Very good. Very good. I see your wheels turning. Did I did? I'm afraid that of dad, Joe. Did I tell you is about ? ? I knew it. Did I tell you about spinning?
Did I [00:25:00] tell you about Joe's cleaner? . The other is folded. Oh, this is relevant. The other folded, but we pressed on . That's inappropriate for the sun cost. Uh, . , exactly. Joe's cleaners did not listen to sun cost. No. They pressed on. They pressed on. Wow. That's it. All right, well, I'll, I'll lighten it up before we leave.
How many parrots does it take to screw in the light bulb ? They say two can do it. Oh God. . I'm so sorry, listeners. , if you liked what you heard. Am I subscribe? You? You're just a fallacy. . . I'm questioning everything, dad. , I'm questioning the future of this podcast. Oh, no. Oh, no, no. I'm just kidding. I'm just kidding.
Uh, but if you liked, you heard, please like, subscribe, share with a friend. We look forward to being in person for this, uh, in a couple of weeks [00:26:00] together. And, If you have ideas for an episode, shout and let us know what y what your ideas are, and uh, if you have an idea for a guest, we would love to hear from you as well.
Very good. Thanks for listening and we will, uh, see you all in a couple of weeks. We will, wherever you are, whatever your story. Thanks for spending time with us this morning. Now go and make a difference in your.
Did you know about the man who went to the doctor and said, doctor, I keep having, you're on a real roll, huh? I keep having visions of the future. When did he start? The doctor said, next Thursday.
Bye everybody. Bye everybody.