Maybe It's Time to Give Up: Sunk Cost Fallacy - Feasible Decision Making

Decision-making is the cognitive process of considering a variety of assumptions arising from past experience, identifying and evaluating alternative options and finally taking action.

However, rational decision-making should not be considered feasible if the "dependent variables" in the assumption are purely the already invested efforts - money, time and energy.

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Real-Life Examples: #1 Real Life

A few months ago with your partner, you bought two concert tickets for the weekend. On the day of the event, you noticed that the weather perhaps is not that suitable for travelling to the concert place as it's located in another city. While making an optimal decision you and your partner will consider the cost of the two tickets paid, which is around 100€ and make a decision accordingly.

However, imagine you received the tickets for free, how this would influence your decision-making?!

Real-Life Examples: #2 Relationship

According to research that has been conducted by Rêgo and colleagues, people who spent years in one relationship and already devoted their time and energy, are struggling to make the right decision if their relationship doesn't go well as expected. They are influenced by their past "investments" while having dilemmas and this sunk cost effect plays an important role in their decision-making.

There are lots of memories that might shape the decision, but only the ones that are important for the future should be considered. The rest might bring you in the wrong direction.

Real-Life Examples: #3 Education

Imagine you are currently pursuing an expensive graduate program in economics and over the past two semesters you spent a significant valuable time of yours and also quite an amount of money on tuition fees as well as on other educational materials.

Any wishes to change your degree program to the one that you really passionate about will put you in a tough situation in terms of decision-making. Indeed that's the reason only around 14% of people according to a survey, dare to make changes. The majority of students apparently take into account the above-given points and are afraid of taking challenging steps.

Real-Life Examples: #4 Business World

Imagine your company had started a long-term investment project since this has resulted after comprehensive strategic analyses and it was an optimal decision in order to maintain the market share and keep up the pace of digitalisation.

Now it passed two years after the project implementation. However, the situation in the market changed drastically, requesting companies to minimize their costs and also adjust their investment strategies. The key question is should the company give up their old investment project and adapt to the change, or should it proceed with the initial decision and keep spending money and resources on the ongoing project?!

We can take another more realistic example. Company "A" spent huge resources building modern office premises, hoping to minimize its rental costs, reshape its brand image, and attract new brains to the company. But what happens if home office/remote working options became popular in the job market, in the presence of digitalisation and also health requirements?! Should the company "A" reconsider its retrospective costs, and still ask its employees to come to the office, or agree on keeping the recently built modern building empty from employees?!

Of course, there will be other key factors like asset depreciation costs, energy or building heating costs, and data security issues that might affect the decision-making process, but in general, companies can take biased decisions if they do not understand that the sunk cost is irrelevant for future and shouldn't justify the subsequent actions.

Conclusion

As mentioned at the beginning decision-making is a cognitive process, therefore emotional aspects are part of the evaluation. However, intentional consideration of the sunk costs can help us to overcome biased decisions. All the time we should bear in mind that the time, energy, money or other resources we made, cannot be recovered, meaning that they became "obsolete" and might not contribute to the future consequences at all.

Consequently, giving up or changing your mind can be seen as challenging and require a strong will, but it should always be encouraged since it shows signs of progress and development.

Source

Wikipedia: Sunk cost - Fallacy Effect

Investopedia: What Is a Sunk Cost—and the Sunk Cost Fallacy?