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Sunk Cost Bias. Definition and How to Avoid It

Sunk cost bias is a psychological phenomenon that plays an important role in human decision making, both in personal and professional life. This bias refers to the tendency to continue an enterprise or project in which time, money or effort has already been invested, even when current evidence suggests that the end result is unlikely to justify the additional investment. Essentially, decisions are influenced by the emotional and financial costs already incurred, rather than by a rational assessment of future benefits.

To better understand the sunk cost bias, it is useful to explore its workings in various contexts and its implications in our lives. This bias can manifest itself in simple ways, such as finishing a movie we do not enjoy, to complex and far-reaching decisions, such as continuing an unsatisfactory relationship or maintaining an unprofitable business investment.

The concept of sunk cost has its roots in economics and decision theory, where it is considered rational to ignore sunk costs when making future decisions, since these costs are not recoverable and should not influence the evaluation of future options. However, in practice, humans often struggle to separate past emotional and financial investments from current decisions.

Several psychological theories explain why people are susceptible to the sunk cost bias. One explanation is loss aversion, a concept from Kahneman and Tversky’s prospect theory, which suggests that people feel losses more acutely than equivalent gains. Therefore, continuing to invest in a losing project may be seen as a way of avoiding or postponing the recognition of a loss.

Another related theory is that of commitment, which suggests that once we commit to a course of action, we tend to justify our initial decision and stick to it, even in the face of contradictory evidence. This phenomenon is deeply rooted in our desire for consistency and positive self-image.

El costo hundido tiene su origen en la economía.

The sunk cost bias can have a significant impact on our decision making. Personally, it can lead us to continue unsatisfactory habits, relationships or careers simply because we have so much invested in them. In business, it can result in the continuation of unprofitable projects or investments due to significant prior investments in terms of resources and time.

This bias can be particularly detrimental in situations where irrational decisions based on sunk costs lead to further losses. For example, in gambling, a person may continue to gamble to recoup losses, ignoring the actual probability of winning. In project management, this bias can lead to what is known as the “sunk cost fallacy,” where expensive projects are pursued to completion even when their feasibility is in doubt.

Sunk cost bias is a complex and deeply entrenched phenomenon that defies rational decision making. Its impact extends across numerous aspects of our lives, affecting our personal, professional and financial choices.

By better understanding this bias and adopting strategies to mitigate its influence, we can make more informed and effective decisions aligned with our true interests and long-term goals. This knowledge not only improves our decision-making ability, but also gives us a greater understanding of the complexity of human psychology and how it influences our behavior.

Recognizing and overcoming the sunk cost bias is essential to improving decision making. Some strategies include:

  • Objective evaluation: separating past investments from current decisions. This involves evaluating a situation or decision based solely on what is expected in the future, not what has already been invested.
  • Long-term perspective: Consider the big picture and how current decisions will affect long-term goals and values.
  • Seeking outside opinions: Seeking advice from people who are not emotionally involved in the decision can provide a more objective perspective.
  • Recognition of loss aversion: Being aware of the natural tendency to avoid losses can help identify when sunk cost bias is influencing our decisions.
  • Flexibility and adaptability: Being willing to change course when evidence suggests it is the prudent thing to do, even if it means acknowledging a mistake or loss.
  • Education and awareness: Understanding how this bias works and being aware of its presence in our day-to-day decisions.

Ismael Abogado

Ismael Abogado

Psychologist and constant learner of the mind and soul.

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