Even if you’ve never heard of it, there is a very good chance that you’ve fallen victim to sunk-cost fallacy at least once in your life. Sunk-cost fallacy refers to when you continue to follow through with a plan or decision even though it would be far more beneficial for you to give up. This usually happens because you’ve invested in the plan or decision in the form of money, emotions, time or any combination of those.
An example of this would be not giving up on your camping trip this weekend even though it’s going to rain because you bought all new gear for this trip. You know you will be miserable during this trip, but you still want to go anyway. Or continuing to pay for a streaming service that you’re really not using because of the off chance that you might use it at some point.
This can also come in the form of continuing to invest in something that may have been successful in the past but is no longer successful now. You may be hoping to see the same returns that you did in the past if you just stick with it, but in reality, it’s not going to happen.
There are no clear reasons for why so many of us fall for this, but one thing is for sure, it can spell disaster in certain situations. Continuing to invest in something even though it’s going to continue losing money will only cause you more hurt in the long run. It’s best to just accept that the money’s gone to avoid losing even more.
All of this is to say, you need to know when to pivot, and when to jump ship entirely in order to protect your own assets. Logic is the enemy of the sunk-cost fallacy. From the outside, it doesn’t make any sense why any of us would do this, and yet, we do. So, it is best to use logic in order to avoid it.
First, actually think about what it is that you are continuing to invest in:
- Why are you continuing to invest?
- Are there any real data-backed facts supporting your continued involvement?
- What will I lose if I stop?
- What will I gain if I stop?
- Am I worried about what other people will think of me if I stop?
- How would I advise someone who was in the same situation as me?
Sometimes, we continue to invest in something in order to save face or to spare someone else’s feelings. However, your reputation is not worth financial ruin. Or it can be awful knowing that all the time and effort that you’ve invested into something will ultimately go to waste. But it is also important to protect your finances and continue to move forward.
Next, put together a plan. What are your goals for this investment? What kind of return do you want to see and what does success look like to you? This of course may change depending on the investment, but going into something with a plan will help ensure that you are looking at it objectively.
Keep track of your investments and understand how they are doing. Not only is this just a good financial planning strategy in general, but it will help you catch losses earlier. This way you can look at the facts of the situation and decide how best to proceed. It should also help curb your emotional investment that you’ve sunk into something.
If you are unsure of how to do this, enlisting the help of a financial advisor will be beneficial. They can help you look at your finances from an unbiased perspective so you can see what is hurting you and what will help you.
Sunk-cost fallacy is a complex psychological bias that most of us fall victim to at some point. But, if you are aware that this fallacy exists and know how to protect yourself from it, you should be able to avoid significant needless financial losses in the future.
Lauren Shwartz | Staff Writer
