The Sunk Cost Effect describes our tendency to follow through on an endeavor if we have already invested time, effort or money into it, whether or not the current costs outweigh the benefits.
A short thread on how it works and how it can make a difference in your life…
Richard is a big Knicks fan.
Monday night after work, Richard is surfing the web looking for a weekend event to attend in New York City.
Richard sees that on Friday night, his beloved Knicks are playing against the Los Angeles Lakers.
The Lakers have the best team in the league and are led by MVP LeBron James.
Richard’s roommate, Steven, is a Laker fanatic. Steven tells Richard that LeBron is going to score 40 points and lead the Lakers to a victory.
Steven and Richard decide to buy tickets to the game for $50 each.
When Friday morning rolls around, Richard does not feel well. His throat is sore and his head aches.
As noon approaches, he tries taking some pain relievers to reduce the inflammation. The medication brings short relief, but the coughing still continues.
It’s now 5:00 pm and a thunderstorm has rolled into New York City. Richard is still not feeling well, but wants to see his beloved Knicks.
Steven returns home from work excited for the game.
“Ready to go Richard?”, he asks.
Richard takes a moment to think about whether or not he should go to the game. On one hand, he is not feeling well and the commute over to the arena in the rain will probably make him even sicker. On the other hand, he paid $50 for his ticket which is non-refundable and has been looking forward to going to this game all week.
Despite the drawbacks seeming to outweigh the benefits in this situation, Richard decides to go to the game with Steven.
Richard has just fallen prey to the Sunk Cost Effect. The Sunk Cost Effect describes our tendency to follow through on an endeavor if we have already invested time, effort or money into it, whether or not the current costs outweigh the benefits.
The Sunk Cost Effect is a vicious cycle because we continue to invest money, time, and effort into endeavors that we have already invested in. The more we invest, the more we feel committed to continuing the endeavor, and the more resources we are likely to put in to follow through on our decision.
As a result, we commit ourselves to decisions that are no longer in our best interests by making decisions based on past costs instead of present and future costs and benefits.
How can you defend against the Sunk Cost Effect?
Try focusing on the future costs and benefits rather than the past investment when faced with a difficult decision. Being aware of the Sunk Cost Effect can help you to make more rationale and productive judgements in various areas of your life.
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