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Surprising psychology: Why do people continue to make bad choices because of sunk costs?
In economics and business decision making, sunk cost is an important concept, which refers to expenditures that have already been incurred and cannot be recovered. Although economists believe that sunk costs are irrelevant for rational future decision-making, in everyday life people are often influenced by past expenditures when making choices about the future. This phenomenon is called the sunk cost fallacy, and it drives people to recklessly invest time, money, and energy in difficult situations, seemingly unable to acknowledge past mistakes. 」
“The impact of sunk costs often causes people to deviate from rationality when making decisions, thus continuing to make wrong choices.”
The definition of sunk costs and the principle behind them
Sunk Cost refers to the expenditure that has been incurred in the past and cannot be recovered regardless of future decisions. According to traditional economic theory, decisions should only consider possible future costs and benefits, not sunk costs that have already been incurred. However, in real life, many people are unwilling to give up a plan or investment because they have already invested too much, even if the future returns are no longer positive.
"Decision makers should not consider sunk costs, but should focus on future gains."
The Sunk Cost Fallacy and Behavioral Economics
The sunk cost fallacy occurs when people persist in pursuing a plan or investment that no longer provides positive returns despite having already invested resources (such as money, time, and energy). This behavior is inconsistent with rational choice theory and often results in a waste of resources. When faced with difficulties, people often continue to invest because they are unwilling to admit that their past investments were the result of failures.
How Sunk Costs Affect Decisions in Everyday Life
Examples of sunk costs are everywhere in life, and we are often faced with such choices. For example, in an unhappy relationship, some people may hold the mentality of "I have invested too much" and continue to maintain an unworthy relationship; or in a business project with huge investment, managers may not be willing to give up even if they see future benefits. Despite the continuous downturn, they still choose not to give up because the money they have already spent makes it difficult for them to make the decision to give up.
"When faced with a failed investment, it's often difficult for people to let go decisively."
Solutions to Sunk Costs
To effectively overcome the sunk cost fallacy, you first need to learn to recognize and accept past decision-making errors. Managers and decision makers should establish clear evaluation criteria to judge the viability of each investment. In addition, teams are encouraged to hold regular project review meetings to give all members the opportunity to comment on ongoing projects. This can promote an objective decision-making process and reduce the influence of personal emotions.
Why do sunk costs lead people to make wrong choices?
Under the influence of sunk costs, people's psychological factors often show a situation of sacrificing rational choices. Emotional baggage, social pressure, and fear of failure can all lead people to choose to continue with investments they’ve already made rather than making wise decisions based on potential benefits.
“The impact of sunk costs stems from people’s emotions and psychological biases, which lead to the loss of the right decision direction.”
Conclusion
Learning to face up to sunk costs and overcome the influence of fallacies in our lives and careers will enable us to make more rational choices and promote personal growth and success. However, can we really break free from the constraints of sunk costs and be rational and clear in future decisions?
