Avoid the Sunk Cost Trap to Make Good Decisions

I recently wrote about how thinking in terms of opportunity cost can help you use your time effectively. Now, I’d like to follow up on that by discussing another concept called sunk cost trap. Along with opportunity cost, this concept can help you make good decisions.

Here is a definition of sunk cost trap:

Sunk cost trap refers to a tendency for people to irrationally follow through on an activity that is not meeting their expectations. This is because of the time and/or money they have already invested.

In other words, once you have invested your resources in something, you may tend to invest more in it even if it’s no longer the best use of your resources. Why would you do that? A common reason is not to “waste” your past investments. Because you have invested your resources on it in the past, you want to get something out of it.

It may sound logical, but it’s actually irrational. Why? Because those resources are already gone. That’s why they are called sunk costs. Rather than making your decisions based on them, you should instead focus on how to best use your current resources going forward.

It’s easier said than done, though. You might want to keep doing what you have done simply to justify your past actions. Letting it go may feel like admitting that you have made a bad decision in the past.

This concept applies not just to your money but also your time. You might keep doing something simply because you have spent so much time on it in the past. It may no longer be the best use of your time, but you don’t want to let it go because you have become emotionally attached to it.

Maybe you keep working at the same place simply because you have been there for a long time. You feel bad about leaving although you know that there is a better opportunity elsewhere.

Maybe you keep doing a personal project because you feel that you have to finish it despite knowing that your time is better spent elsewhere.

Take some time to reflect on your situation. Do you fall into a sunk cost trap somewhere?

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