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20 real life examples of the Sunk Cost fallacy
The sunk cost fallacy occurs when we are unable to cut our losses due to the past money or time we have spent on an an activity. Instead of making the rational choice to maximize our utility at the present time we end up trying to regain the time or money we have already lost by continuing to spend more time or money. This fallacy often leads to irrational decisions. This article looks at 20 different real life examples of the sunk cost fallacy.
1. Football Transfers and sunk costs
Your favorite team spent more than 70 Million Pounds on a defender. He is not playing well but since the team spent all that money he has to start every game. Instead of doing what is best for the team and benching him, the past costs are considered and he starts every game. Even in the NBA players that are drafted higher tend to play more minutes(regardless of player performance). A classic example of the sunk cost fallacy.
2. Breaking the diet and sunk costs
You were following a strict diet but ended up ruining it at lunch by having a delicious Pizza. At dinner you were planning to eat healthy but since the diet is already ruined you might as well go all out and eat something unhealthy during dinner too. Another common example of the sunk cost fallacy.
3. Bad movies and sunk costs
"This movie is terrible but since I have already paid a lot of money for the ticket I should sit and watch the whole thing". Unfortunately we do not realize that by watching the movie we are not going to get our money back. Furthermore we end up wasting precious time.
4. Why are breakups always hard?(Explained by the sunk cost fallacy)
"I might as well carry on dating him/her cause we have been going on for 6 months now. If we break up now it will all be a waste". This is another common example of the sunk cost fallacy. It may also be the reason why people often decide to carry on unhappy marriages. After all nobody is a fan of admitting that they picked wrong and wasted a large part of their lives.
5. Overeating and the sunk cost fallacy
You ordered a burger which turned out to be terrible. However as you have paid a lot of money for the Burger you end up eating it despite the taste. You don't realize that whether you finish it or not the money has been paid. Furthermore during a buffet you often end up overeating as you believe that you need to make most of the money that you spent. You do not realize that eating more is not going to bring that money back. Once its gone its gone.
6. The sunk cost fallacy while investing in the stock market
Warren Buffett once famously said "When you find yourself in a hole, the best thing you can do is stop digging.” Investors often fall in love with an investment and hold into it even when its fundamentals have changed or the companies narrative has changed. A lot of it is because investors bought the stock at a higher price and are unwilling to accept their mistake. Due to loss aversion, we stick to the investment despite a clear change in the numbers and the narrative of the company. (Of course this is hard to identify )
7. Research and Development
Since we have already spent 200 Million while trying to make this product we should not give up now. Lets keep spending more or else that 200 million will be a waste. Due to asymmetric payoffs this is often hard to understand at that very moment. Concorde was a supersonic passenger jet and was a project which both the French and British governments were working on together. After some heavy investment it had become evident that the expenditure was very high and the revenues expected were to be quite low. While writing it of would have been prudent due to the resources already spent by both parities, it was decided to carry on spending on this project leading to further loses.
8. Career decisions and sunk costs
If you spent almost four years on a degree, working in a job in that very field is the obvious route. Unfortunately even if you want to switch paths you will hesitate as you have spent a significant amount of money and time on your degree and you do not want to make all that "go to waste".
9. Advertising and the sunk cost fallacy
You may have spent a lot of money promoting a product but the sales do not support the promotion. Unfortunately it is very easy to think that since you have already spent so much there is no stopping and you should go all out and spend even more on marketing. (Again tough to understand during the process but easy to make sense of in hindsight)
10. Event signups
Lets say you signed up for a virtual talk on investing for around $100. Unfortunately the speaker is terrible. He cannot explain the basics and you cannot even follow what he is saying. It may be smart to quit but since you spent $100 dollars you end up wasting the 2 hours. Unfortunately even if you quit the $100 dollars would not have come back. Unless you learned something in those two hours, you lost not only the $100 but also 2 hours of your time. This may occur for other events too like signing up for a music festival and going even due to bad weather since you do not want to waste the sign up money.
11. Sunk Cost in cricket
Let say you are chasing 200 in 20 overs. You get of to a slow start and end up making 4 runs in 10 balls. You really need to accelerate to make up the slow start. Unfortunately seeing this slow start you put added pressure on yourself to perform later which in turns makes you value your wicket even more. This may lead to you taking lesser risks and hence sticking to batting slow. You might even try to take more risks but just not find the boundary and also not get out. In this case retiring or getting stumped may be a good policy. Now of course players like Rahul Tewatia may bring up the argument why this is not ideal and how a batsmen can always recover. While that is true the probability of that occurring is very low. Furthermore we fall for survivorship bias as stories of a player recovering and winning are very popular. These success stories hide the numerous failures. After all a batsmen failing after wasting balls does not really make the news. (I am not a cricket expert but this is something which I believe should be further looked into)
12. Casino and sunk costs
Much like breaking a diet, if you are on a bad streak in a casino and and have already lost close to 70% of your budget you may believe that since you have already lost so much no harm in gambling the rest of it too.
13. Shopping and sunk costs
You travel 7 kilometers to a shopping mall. You spent say Rs 60 just to get to the mall. Now you might think “I came all this way, so I might as well buy something”. While this seems rational you are falling for the sunk cost fallacy. This is one of the reasons why outlet malls often perform better than regular malls.
14. The sunk cost that occurs while changing majors
"I hated the introductory economics class. However since I already took it I might as well take intermediate economics and try to complete the minor". The time and effort we put to study something may make it difficult for us to switch from it, despite our lack of enthusiasm for the subject.
15. Phone repair and sunk costs
You repaired your phone a month ago. Unfortunately another problem has come up which will again cost you big money. As you had repaired it a month ago you go on to repair it again as you don't want your repairing cost from a month to go to waste. Unfortunately this is again the sunk cost fallacy as repairing should be forward looking and not backward looking.
16. Membership Programs and sunk costs
When a customer enrolls in a membership program he/she usually pays a fee, to earn special discounts and offers. Having paid this fee a customer in order to make full use of the membership may end up taking offers he/she otherwise would not. The customer wants to make full "use" of the the membership fee.
17. Video game addiction and sunk costs
If you are an avid gamer you spend hours and hours building characters, increasing game levels, unlocking new skills and so on. Then eventually when you take the decision to quit the game you are faced by the sad realization that all the time spent developing characters and unlocking new levels will disappear. This may lead you to carrying on playing the game even if it does not interest you like it used to.
18. Expiry Dates for Products and sunk costs
You bought a product which you later realized have no use for but as the product is close to expiry you end up consuming it anyways. A classic example of the sunk cost fallacy.
You have gone to South Africa for a wonderful holiday. You may have no interest in Wildlife but since you have taken the effort to go all the way to South Africa, you decide to visit a wildlife sanctuary. Another example of the sunk cost fallacy.
20. Hitting the gym
A positive use of the sunk cost fallacy can be seen when one enrolls to hit the gym. Instead of doing fitness exercises at home, paying money to hit the gym creates the impression that you are wasting money if you do not hit the gym. While that is not really the case as you may have guessed, it is a positive example of when the sunk cost fallacy may actually benefit you.