Avoid the Sunk Cost Trap

Sometimes my educational backgrounds in economics and psychology converge. One of those times is exploring how to avoid the sunk cost trap in making career and life decisions.

Sunk Costs Quote

In the field of economics, sunk costs are costs you already paid and that you cannot recover no matter what you do. Examples of sunk costs are time or (non-refundable) money already spent.

In the field of psychology, researchers observe that most people try to justify sunk costs by continuing in the same direction even when the evidence is that the direction is no longer a good one. In day-to-day life, an example of a sunk cost is an expensive outfit you purchased that no longer fits, doesn’t look good, and isn’t comfortable. But assuming that you have other clothes and can afford to buy more, if you keep wearing the outfit because you don’t want to waste the money you spent on it, you are forgetting that the money spent is gone whether you wear the outfit or not. You could be happier if you stopped wearing the outfit.

In the career arena, sunk costs are things like graduate school or the dues you had to pay in the beginning of a career path. You cannot get back that time or money, and in many cases, staying in a career path because of sunk costs is just making a situation worse and worse. The expression “throwing good money after bad” is applicable here.

Instead of continuing down a path once the path is no longer working for you, you should be looking at opportunity costs of remaining vs staying.

Here are questions to ask yourself when deciding whether to abandon a current career path:

1. Are you overly focused on avoiding loss without recognizing that failure to pursue a new, desirable path would also be a loss? (This is important because research consistently shows that humans dislike loss even more than they like gains.)

2. Are you preoccupied with avoiding the appearance of failure? For a fascinating case study about this fear, read about the Concorde, the doomed airline project where British and French development teams continued to plow resources into the Concorde aircraft project for 27 years because they didn’t want to admit that the project was failing. The irony is that this project is now the most widely cited example of the sunk cost fallacy in decision-making.

3. If your best friend were continuing on the path you are on, would you find it easy and obvious to advise your friend to cut his or her losses? If you would advise your friend differently than you would advise yourself, then that’s a clue that emotions are driving your decision in a way that might not be serving you well.

4. What is the anticipated trajectory of your current path? Is there a chance that it will get better over time, or will it likely stay bad or even get worse?

5. Would it allow you more psychological freedom to change direction if you reframed how you view the current situation? For example, it might make you feel better to view an endeavor as a learning experience instead of a mistake. There are likely valuable aspects of the experience even if you now change direction.

6. Even if making a change would be difficult, are you more or less likely to be happy in the long-term if you switch direction? Try not to sacrifice long-term happiness to avoid short-term discomfort.

7. When you evaluate each path, take into consideration your personality. One person may find uncertainty to be intolerable but another may find too much routine to be suffocating. If you know yourself well, you can choose a direction that is a good fit for you.

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