Mental Shortcuts - Sunk Cost Fallacy

Sunk Cost Fallacy

Let’s dive a bit deeper into the concept of the sunk cost fallacy. Essentially, it’s the idea that we tend to make irrational decisions based on the past investment we’ve made in something, whether it’s time, money, or effort. We feel like we can’t walk away because we’ve already put so much into it, even if we know it’s not the right choice for us.

In the cinema example, it might seem like you’re making a rational choice to stay because you’ve already spent money on the tickets. But in reality, the money is already gone, and staying to watch a terrible movie isn’t going to change that. You’re better off cutting your losses and doing something else that will make you happier.

The same idea applies to relationships. If you’re in a situation where your partner is continually unfaithful, it might feel like you’ve invested too much time, energy, and love to walk away. But the longer you stay, the more you’ll suffer, and the more time you’ll waste on something that’s not working out. It’s essential to recognize that you’re not throwing away the past investment, but rather investing in yourself and your future happiness.

In the stock market, the sunk cost fallacy can be even more dangerous. When the price of a stock is dropping, you might feel like you can’t sell it because you’ve already invested so much money in it. But if you hold onto it, you risk losing even more. Instead, you should evaluate the stock’s current status and forecast objectively and make a decision based on that information, rather than what you’ve already spent.

The sunk cost fallacy can be challenging to overcome, but it’s essential to recognize when it’s affecting your decisions. One way to combat it is to think about the decision from a fresh perspective. Imagine you’re starting from scratch and ask yourself what you would do in that situation. This approach can help you focus on the present and future rather than the past.

In conclusion, the sunk cost fallacy is a cognitive bias that can cause us to make irrational decisions based on past investments. Whether it’s a bad movie, a toxic relationship, or a failing stock, it’s crucial to recognize when you’re falling victim to this trap and make decisions based on what’s best for you moving forward.

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