Sunk cost fallacy and mindless behaviour
If you’ve ever persisted with a dead-end job, a loveless relationship or a university degree you quickly regretted starting, all in the hope things will somehow improve, you might want to pay attention.
Maybe you’ve endured reading a novel you hated from the first chapter or stayed through a movie just because you bought tickets – despite the fact you would rather be anywhere else.
You’ve likely done something similar with money.
Perhaps you’ve plunged money into a failing small business or felt obliged to stick with a stock after it crashed, then watched it go lower and lower. Certain cryptocurrencies come to mind.
Maybe you’ve stuck with a supplier at work because they promise to do better when they never live up to them.
Who hasn’t ever ‘chased their losses’ by doubling down on a bad bet?
All these actions, and anything else where we ‘throw good money after bad, are examples of a famous economic principle called the sunk cost fallacy, which can be applied to life in general.
It’s the tendency to continue with an irrational and risky course of action based on blind hope more than the likely outcome.
We do it, but we don’t want to ‘waste’ unrecoverable costs and time – aka sunk costs.
The principle explains why we persist with bad decisions even when they make our personal and work lives more difficult.
It’s a very human response to the loss to try even harder to win, sometimes to avoid feelings of guilt or inadequacy, or even just fear of looking bad.
But ego, politics and emotional decision-making can cause people to double or triple their financial losses, causing ongoing financial stress and emotional stress for individuals, their families and their organisations.
In the cold light of day, it’s not rational, but who hasn’t done something like this.
More importantly, how do we stop this apparently mindless behaviour.
Researchers Andrew Hafenbrack, Zoe Kinias, and Sigal Barsade published their work, ‘Debiasing the Mind Through Meditation’, Mindfulness and the Sunk-Cost Bias in the Journal of Psychological Science 2013.
In the research, the results suggest that increased mindfulness reduces the tendency to allow unrecoverable prior costs to influence current decisions.
“Meditation reduced how much people focused on the past and future, and this psychological shift led to less negative emotion,” Kinias wrote in the journal.
“The reduced negative emotion [then] facilitated their ability to let go of sunk costs.”
Evidently, mindfulness has some power over bad financial decision-making.
When it comes to how we interact with money, the optimum state is one of financial mindfulness.
Financial mindfulness is described as having awareness and paying attention to your finances and financial behaviours. It means more than being money smart or financially savvy, as it includes the capacity to regulate emotional responses that can lead to unhelpful financial behaviour and financial stress.
It is not necessarily about having a good financial position or good financial health, but an active process of being aware of and paying attention to your thoughts, feelings, and financial behaviours in a helpful way.
Another study from Elsevier’s journal Personality and Individual Differences in 2007 found “mindfulness is associated with less severe gambling outcomes”.
Chad Lakey, Keith Campbell, Adam Goodie (University of Georgia) and Kirk Warren Brown (Virginia Commonwealth University) were “hopeful that the greater attention to and awareness of ongoing internal and external stimuli that characterizes mindfulness may represent an effective means of mitigating the impulsive and addictive responses and intemperate risk-attitudes of individuals with problem gambling.”
That’s a long-winded way of saying that paying closer attention to what’s going on around you can reduce compulsive behaviour.
The researchers concluded: “In this light, mindfulness may help to lessen the grip of automatic thoughts, affective reactions, and behaviour patterns.”
Mindfulness also loosens our grip on any particular course of action, and it can help us become a little more flexible in our thinking.
It allows us to stand back from a problem and look at it holistically.
Research into the specific benefits of mindfulness is ongoing, but it seems clear that regular mindfulness practise can positively affect dysfunctional decision-making around money.