How the Sunk Cost Fallacy can Positively Impact your Life
The Sunk Cost Fallacy (SCF, henceforth) has a negative connotation. But it doesn’t have to be, you can also use it for positive change in your life. We can use the SCF to keep continuing doing beneficial actions even when we no longer want to. Here’s how.
Definitions
A sunk cost is some form of cost (time, money…) that has been paid by an individual and that can in no way be recovered. SCF is when as a result of some sunk cost individuals continue to do some action even though it may not be favourable or optimal to continue this action. Example: continuing to eat a big meal, because you’ve already paid for it (the sunk cost), even though you are already full.
- The Effects of SCF decrease over time
Gourville and Soman (1998) found that gym members went to the gym most frequently in the time directly after their gym memberships were billed and that the number of visits to the gym weened off as time from the billing date increased (these gym members were billed bi-annually).
This shows us that the SCF acts as a kind of motivating factor to go to the gym and that this motivation slowly fades until the next billing date. The gym-goers don’t want to feel like they are wasting their money on an unused gym membership so they frequent the gym to get their money’s worth, but as time goes on they slowly forget about this sunk cost.
How can we use this practically in our own lives? Firstly, Make the billing of your gym membership frequent and evident (monthly billing with notifications by email or text). this will prevent the sunk cost from fading in your mind. Secondly, you could choose the most expensive gym in your area: this will increase the size of the sunk cost. The more sensitive you are to the loss of money the more motivated you will be to make the most of your membership.
2. Overpriced Coffee trick
You can even use SCF in smaller (less expensive) ways. For example, I don’t like buying coffees in cafes because I think they are grossly overpriced. However, I use this negative sentiment to my benefit. After I buy my overpriced coffee, I’ll stay in the cafe for hours and hours just so that I feel like I’m getting my money’s worth. While I’m there, I’m typically working or studying. In effect, I am not just paying for the coffee but also for the few hours of productive work. If you would like to increase the SCF, even further you could tell yourself “I’ve already got myself ready and dressed to come to this cafe, so I might as well spend a long time here.”
3. Embrace your Large Investments
Often times businesses will continue to pursue bad investments due to large initial investments, even though the expected return on the project may be negative. Example, The French and British governments investment in the Concorde. How can we learn from their mistakes? I like to call this the Large Investment strategy.
Let’s say you want to be a YouTuber, so you make a sizeable investment in a camera. You’ve made this large investment, but it isn’t necessarily a sunk cost, because:
- You can always resell the camera, so at least your guaranteed to recover a portion of your initial cost.
- You can always repurpose the camera. Instead of using it to make YouTube videos, you can justify just using it to record your next vacation on it. In this way, the video camera is no longer connected with your original ambition of filmmaking but still retains its value.
These two factors make it easier to mitigate the effects of SCF. Who could the British and French sell the Concorde to after they saw the project wasn’t going well? How could they repurpose the Concorde? Make it into a bomber? They didn’t have such choices and that’s why the effects of SCF were so pressing.
In our example of the YouTuber, we want to embrace the effects of SCF in order to continue to make videos when we longer want to. To increase the sunk cost we need to do two things:
- Reduce the liquidity and value of the camera
- Reduce the ability to repurpose the camera
To do this we can personalise the camera, like write our names on it with some paint. Just make it our own. I like the way Casey Neistat personalises his own equipment. Besides personalising his stuff, he also creates special labelled areas in his workspace for each piece of equipment. This increases the sunk cost even more!
He has no fear in using a permanent marker on a piece of equipment worth thousands of dollars. If you haven’t seen Casey’s set up, I highly recommend checking it out. It’s quite remarkable (His studio tour video).
Personalising is straight forward, but reducing the ability to repurpose is trickier. The simplest way to do it is to make a mental promise to ourselves to only use the tool for our desired action (making videos). Obviously, we could relax this promise as other opportunities present themselves to us. Perhaps, instead of becoming a YouTuber, we end up having a career as a wedding videographer.
Kindle vs. iPad
For this reason, I love highly specialised products which can only be used for one or two purposes. A great example of this is when I bought a Kindle. The fact that its only function is as an e-reader makes it useless to any other activity than reading. In this way, I have no way of repurposing it for a different use. It’s for reading and that’s it.
When it comes to a device like the iPad, sure at first you may tell yourself that you’re only going to use it for reading. But gradually it starts to become more and more of a media consumption device rather than a reading device(Well, at least in my own experience). It’s like that proverb from Spiderman with great power (or rather, great versatility) comes great responsibility.
Conclusion
By embracing the Sunk Cost Fallacy we can continue to perform our desired actions (exercising, studying, filmmaking, reading…) even when life throws its challenges at us.