Know When To Quit - The Sunk Cost Fallacy - YouTube

Play along with me here.

Let's say you're planning your next summer vacation.

So you go on the internet and look for a few different destinations you'd like to visit

this year.

You find a trip to Rome, a city you want to visit, but it's not something you're too excited about.

The travel package includes a plane ticket and a stay at a hotel for a total of $2000.

This package is non-refundable, but you didn't find anything better, so you decide to book

the trip.

Then the next day you do some more searching and you find another potential trip.

This time it's to Paris, your favorite city.

The travel package comes with a plane ticket and it includes a stay at a much more luxurious hotel.

For the cherry on top, the trip is on a discount and it costs $1000.

Again, the ticket is non-refundable.

But since you'll be taking two separate breaks this summer, you decide to book this trip as well.

However later that day you realized that you've made a small mistake.

You accidentally booked the trip to Paris, for the same week as your trip to Rome.

You're unable to change the dates, because the hotels are fully booked, and you can't

refund the tickets.

You're now faced with a tough choice.

Do you go to Rome or do you go to Paris?

You start weighing your options.

If you go to Rome, you'd only lose out on $1000 you paid for Paris.

But if you go to Paris, you'd have to swallow a loss of $2000 you paid for Rome.

You know that in Rome you'd have a decent time, but in Paris you'd have an amazing time.

So which do you pick?

Roughly half the people who are presented with this question will answer that they would

go to Rome.

Reason being that the trip has cost more money, therefore they would minimize their loss.

However this sort of thinking is misguided.

The better answer would be to go to Paris.

If you pick Rome, it might seem like you're only losing $1000, instead of $2000.

But that's just an illusion.

You've spent $3000 for either trip and you can't get this money back.

Your loss is actually equal.

So the wise thing to do is to choose the trip that will bring you the most joy in the future.

In this case, a trip to Paris, your favorite city, which includes a superior hotel.

What I've just described is what psychologists and economists call: the sunk cost fallacy.

It's one of the more common cognitive biases that clouds our judgement.

Essentially the sunk cost fallacy is this: Making a decision based on your past losses,

instead on potential future returns.

Let me give you another example: Let's say you buy a $10 movie ticket.

But 15 minutes in, you realize this movie isn't what you expected it to be.

However, because you feel like you're supposed to get your money's worth, you decide to watch

the rest of the 2 hour movie.

This decision is based on your loss of $10.

But it isn't an optimal one.

A more logical thing to do, would have been to get up and leave after you had realized

this movie wasn't what you wanted to watch.

Wouldn't you be better off, had you only wasted $10 and 15 minutes of your time, instead of

wasting $10 and 2 hours?

Had you left early, you would've essentially gained 2 hours of extra time.

And that would be thinking based on future returns.

Those $10 you spent were gone or "sunk" either way.

You couldn't get them back, whether you watched the rest of the movie or not.

And that's what the sunk cost fallacy does.

Because we don't want to feel like we wasted our resources towards something, we're more

willing to stick with it, even if it's not beneficial.

And this doesn't apply just to money, but to time and effort as well.

For instance, relationships are a prime example of this bias.

The more time someone has spent with another person, the harder it is for them to break up.

In some cases, even if the relationship becomes completely dysfunctional or even abusive,

they will continue to stay in it, when really, it would be healthier if they parted ways.

Now, I'm not saying that couples shouldn't attempt to fix their problems.

It's worth at least trying, but if they stay together just because they've invested so

much time, money or effort into the relationship, they're only going to be more miserable down

the line.

It's better to call it quits now and save yourself from future misery.

Yet people are willing to spend years in an unhappy relationship, just because of their

past investments.

And yes, I know that there are plenty of other reasons why people stay together, but sunk

cost is definitely up there.

The same goes for people's education and careers.

Many think their job is terrible, but they stay in it, because they've already put in

so much time and effort.

Let's take this lawyer for example.

He went through 7 years of school to get his degree.

But 3 years into his profession, he realized this job isn't for him.

And that he would be happier somewhere else.

He wants to change his occupation, but now he's faced with sunk costs.

He basically spent the last 10 years of his life working on this career.

If he were to quit, it would basically mean that he wasted a portion of his life.

But those years were spent and they're gone, no matter what.

Is it worth being miserable for the next 40, just because of the past 10?

Of course not.

That's a bad bargain.

But again, sunk costs often compel people to stay in their miserable jobs.

Now the sunk cost fallacy doesn't apply just to individuals, but to nations as well.

When countries lose hundreds of soldiers in a war, they commit even more resources towards it.

They believe that the sacrifices made by the previous soldiers shouldn't be in vain.

So they send even more soldiers into battle, instead of finding a diplomatic way to resolve

the issue.

But those lives that were lost, sadly won't be returned by doing more fighting.

Instead the opposite happens.

Even more lives are lost, as the war goes on.

I think you see the problem.

Now the reason why we fall for sunk costs so easily, is because we don't treat gains

and losses equally.

If you had $0 and I gave you $100, you'd feel pretty good.

But if I then took back the $100 I gave you, you wouldn't feel the same you had felt before

you possessed the money.

You'd actually feel worse than before.

You would process this interaction as a loss of $100, even if on paper, you didn't actually

make or lose any money in the process.

I would have to give you back the $100, just for you to feel like when you had $0.

And to make you happy again, like when you received the first 100, I'd have to give you

another $100.

So $200 in total.

Crazy right?

We feel twice the emotional reaction when we encounter a loss, compared to when we gain

the same amount.

This is why we need double the gain, just to offset the loss.

And because we're so reluctant to accept losses, we're more willing to double down and start

pouring more money, time and effort towards whatever we would "lose".

Of course this often results in more loss, making you more likely to invest even more

resources into a lost cause.

This creates a perpetual negative loop, where we're unwilling to quit because of our previous

investments.

Now I want to share my personal experience with the sunk cost fallacy.

I know some of you will relate to it.

When I was younger I loved spending my time playing video games.

But as I've grown older, I didn't enjoy them as much, so I decided to quit.

However, it wasn't that easy.

I had this maxed out character, which I spent countless hours on.

I was emotionally invested in its development.

And I felt like it would be such a waste to throw it all away.

But in reality, it didn't matter any longer how good I used to be at the game.

It didn't matter how much time and effort I had put into it.

I didn't enjoy playing any longer and it made no sense to continue, just because of my past efforts.

I would only be wasting more time and effort that could be spent on hobbies that I actually

enjoy now.

Only once I realized that this was a clear case of sunk cost, was I able to move on.

I cut my losses and quit the game.

The message of this video isn't to quit or to give up on everything.

Perseverance is important and there could be plenty of good reasons to continue

pursing something.

I just want you to be aware of the sunk costs, and to ignore them when making a decision.

Remember: what's spent is spent.

If you continue to pour more resources into a failing project, you're just digging a bigger

hole for yourself.

Making it even harder to quit.

So learn to cut your past losses.

Instead, look for potential future returns.

Thanks for watching.

I hope you learned something new today, and you became better than yesterday.