Overcoming the Sunk Cost Fallacy (KS Lesson #268)

11 July 2019 | 24 Comments

Have you ever succumbed to the sunk cost fallacy? I have, and I just barely escaped from it.

If you’re not familiar with the concept, here are two excellent definitions:

  • “Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort) (Arkes & Blumer, 1985).” (Behavioral Economics)
  • “…the more you invest in something the harder it becomes to abandon it.” (You Are Not So Smart)

As the first definition suggests, the sunk cost fallacy isn’t inherently bad. Like, you might be watching season 3 of Stranger Things right now. Part of the reason you might be doing so is because you’ve already invested your time and energy into the first 2 seasons. That isn’t a bad thing, especially if you’re continuing to enjoy the show.

However, as the second definition points out, it’s often the case that as you spend more time on something, the harder it is to stop, even if there’s an accumulation of evidence suggesting otherwise. (I’m not suggesting this is the case with Stranger Things–I haven’t watched season 3 yet, but I’m looking forward to doing so.)

That brings us to how I succumbed to the sunk cost fallacy with something you’re using right now: the Stonemaier Games website.

Since 2012, I’ve used GoDaddy as my hosting provider for this website. From my non-techie perspective, I thought they did a pretty good job. Sure, the site went down from time to time, but GoDaddy has good customer service, and they’d generally get it back online within the hour.

So at a certain point after paying for annual renewals, I made a long-term commitment. I can’t remember the exact numbers, but it was something like a 10-year prepayment with a significant savings per year as a result. It seemed like a good financial decision at the time.

However, as this website and its audience grew, our hosting service with GoDaddy couldn’t quite keep up. Our web developer, Dave Hewer, could go into detail about this, but to put it in basic terms that I understand, our website site was really slow.

Dave would tell me about this every few months (gently, not pushy), but my response was always the same: I’ve already prepaid for 10 years of GoDaddy, so we’ll just wrap up that commitment and then change hosting providers.

This is classic sunk cost fallacy behavior. An expert was providing hard evidence that there was a better option, yet the primary reason I didn’t want to change was an unchangeable investment.

Fortunately, a few months ago, the website got so unbearably slow that I asked Dave to switch to a different hosting provider (he chose FreshSites). And you know what? I haven’t thought about the wasted prepayment for a single second since then.

I wish I had a magical formula to help you avoid the same sunk cost fallacy travails, as it could save you a huge headache regarding your business, relationship, education, creations, and consumables.

While I don’t have that, I have an idea that I think may work. It’s a 3-step process:

  1. Admit that you have a specific sunk cost issue. If you ever find yourself tempted to make a change but the reason you don’t is because of an existing investment in time, money, or effort, you may have a sunk cost issue.
  2. Consistently and repeatedly ask yourself if you’re happy with the status quo for one week. Keep a sticky note on your desk with the results. Depending on the issue, you might need more time or even use a scale from 1-10. Just make sure to focus on the present, not the past or the future. Are you happy RIGHT NOW?
  3. Act accordingly to the results of your self-survey. If you look back at your notes and see that you’re consistently unhappy with the situation in the present, you should be able to see that it’s unlikely to change in the future. This voids the relevance of the past–the anchor of the sunk cost fallacy–and will hopefully inspire you to make a change. But perhaps you’ll also find that the status quo really isn’t all that bad, and you can stick with it.

That’s one possible solution of many. Have you ever encountered a sunk cost fallacy in your life, and how did you address it?

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24 Comments on “Overcoming the Sunk Cost Fallacy (KS Lesson #268)

  1. I there are different parts of general Sunk Cost Fallacy think about, there are a range of ways in which sunk costs can negatively effect otherwise rational business thinking. There’s what is called being ‘Pot Committed’ in poker, there is what I think of as ‘The Great Colour’ issue and then there is ‘Clearing Your Plate’.

    In poker, say I have suited 8 & 9, its worth paying in to see the next card, since I have straight and flush draws, if the price isn’t too high. However the best I might see is an off suit jack. Generally I’d never consider paying to see a draw to a straight like that, but the question is whether a small price for a small percentage chance of winning back the previous commitment changes against the flat percentage itself. Which is to say, I won’t pay $10 for a 5% chance of winning $20, but I might pay it if it would win me $100, particularly if $50 of it was mine. Which is a sort of sunk cost fallacy and is problematic and dumb, if its a waste of $10 then it remains a waste whatever you put into the pot.

    Another part of the fallacy is when you buy a new car and it sucks, it breaks down, its ride quality is poor and fuel consumption sucky. So there are two options open to you, you admit you made a mistake and are in some way dumb, which hurts emotionally. Or you conclude that the car’s colour is the greatest in the world, and you love the cup holders, or the ride height, or something else minor to preserve your self image, potentially living with a sucky product for years because of it. Its for this reason that sometimes more expensive products are, counter intuitively, more beloved than the same thing.

    I think the desire not to appear wasteful, clearing your plate, is sort of the most double edged of these. I buy a meal in a restaurant and I’m not enjoying it, if I hunker down and chew through it I’m engaging in a sort of sunk cost fallacy, I’m eating it because I’ve paid for it. At the same time though, it will serve the basic purpose of the meal, I will cease to be hungry and my body will be fuelled. If I discover my distaste for the meal far enough into it to make a re-fund impossible arguably my decision to continue due to my sunk cost is rational, stopping and paying for a second meal that I may be too full to finish just to gain extra eating pleasure may be foolish. Worse, if we never count in sunk costs in these choices we can end up committing to expensive failures and wasting money, because we can just ‘try again’ if things go wrong, I think this leads to a different sort of fallacy the ‘Pre-Sunk Cost’ fallacy, where costs are counted as dispensable sunk costs before they’re even spent.

    I would ask, Jamey, how far through your 10 year contract were you, and would your thinking potentially change depending where you were through those 10 years?

      1. Yeah, I imagine that halfway through is probably the golden time for being able to make the smart choice to move on. One year in and I’d be annoyed about losing the nine years, nine years in and I’d just put it off for that last year. Getting five years value out of it, but making the smart choice for the next five is kind of a great place to be.

  2. Gamers experience it all the time. We like a game and sink some money into providing components the publisher didn’t — things like organizers or play mats that cubes aren’t constantly getting bumped off of or supplemental tokens because the supply always runs out — and then we buy more stuff and expansions because we’ve already invested so much money and time in the game, even when the game or the expansion has stopped providing value. This is especially true with legacy games. So the fallacy works both ways.

  3. Jamey this is an interesting take on issues companies face day to day, I think its important to have positive feedback loops implemented into operations though.

    I would rather a company spend its time asking what are we good at, as Jim Collins writes in his book, Good to Great, concerning the Hedgehog Concepts, rather than spend a week focusing on what’s going wrong.

    Your company is really good at producing high quality games. Every thing else is just noise, anything your doing that that doesn’t directly lead to a sale needs to be cut.

  4. If you take $1,000 to day-trade on the stock market (you must sell and then buy 1 stock every day) you will cure your self of sunk cost fallacy forever. You might even have enough for a cup of coffee at the end :)

    P.S. Season 3 is just as good.

  5. As a web developer myself, I am intimately familiar with the problem you outlined. One of my SEO clients chose to stay at GoDaddy despite a free hosting switch and nearly lost his website due to a hack and subsequent failed GoDaddy backup issue, all because he paid for a long-term hosting plan.

    As a former semi-pro poker player, sunk cost is a very real issue.

    As a Christian, my sins are sunk cost and have been paid for with blood.

    As a game designer, a hundred play tests with something are sunk cost when that thing needs to change. A hundred more play tests might be required as a result, but breaking free from the sunk cost fallacy almost always carries you forward as a result! Those are the outcomes we need in design, right? :D

  6. Holy cow – now I have a name for it! My company has been struggling for years about changing web hosts because of all the money they’ve spent with our current, terrible provider. Thanks JM! Now I can point out to them the inherent stupidity of sticking with a sinking ship.

    I understand the mentality – I have thousands of dollars tied up in fancy costumes for charity work, and that was the main motivator for staying in a group that was toxic. Eventually I saw the light that the group wasn’t going to change and that I needed to move on for my own mental health, despite all that money spent.

  7. Is there any value in staying the course if – by experiencing the pain – you learn the lesson and avoid future sunk cost issues? I wonder if there is a fine line between falling into the fallacy, and paying the “stupid tax” to learn the lesson. This is a general question, and not related to your website. If you are happy with the decision, seems like it was the right call.

    1. Casey: Definitely, I think there’s a lesson to be learned here that can really only sink in if you experience it yourself. My method may allow that to happen, as you’re determining an amount of time to live with the decision and see how it feels (but also gives you the opportunity to change it).

  8. Opinions. If I have an opinion I think is”right” and someone suggests my opinion is wrong. I tend to look for something suggesting I’m right and that the other view of my opinion is wrong.
    The more I invest in proving my point, the more I tend to ignore actual facts suggesting I should change my opinion.

  9. And also drafts for novels. If the amount of time passed since the original inspiration hit is a long one and subsequent redraftings and attempts have taken years of your writing life… it’s painful to admit to yourself that this particular story may not be finishable.

  10. I know it’s already been mentioned, but expansions for board games are a really good example of Sunk Cost Fallacy, especially the games with a larger number of expansions. Dominion is a good example – already having invested in all the 6, 7, 8 etc expansions to date I would end up buying the new ones as they came out because I had already invested so much in the game (and being a completionist also comes to mind), even though I was barely able to get the game to the table. In the case of Dominion is was the case of recognizing the situation and the lack of plays, and deciding (and managing) to sell off the entire collection so that I wouldn’t be tempted to buy anymore. I definitely took a significant loss on the sale (as is the case when selling off such a large collection), but not being tempted to buy any more expansions for it was definitely worth it.

    I guess the same goes for hobbies as a whole. Definitely food for thought and a worthwhile discussion :)

  11. It’s not easy to dodge this type of situation. Jammie, I recommend a good article about bias, human behaviour and decision making. “Before you make that big decision”, by Daniel Kahneman. If you don’t find it, send me an email.

      1. I dont know if I can top the previous examples, but another example of this can be with older cars and constantly funding repair after repair because “I just put $XXXX into it, so I can’t get rid of it.” Instead, the real debate should be do I still feel this vehicle will provide enough value with this repair as opposed to committing those dollars towards a replacement vehicle.

  12. A small but daily relevant thing for me is eating. I started my plate so I have to finish it– can often lead to over eating — same thing with drinking half a beer too much. I don’t always, but i try and view these things in terms of sunk costs. Helps remind myself I don’t need to eat all those fries with my burger

    1. I like that parallel, Evan. I don’t drink much, but occasionally when I do, I’ll find myself halfway through a drink and not really wanting to finish it. In those circumstances, I try to remind myself that no one is requiring me to finish the drink and that I’m happy with what I’ve already consumed instead of not enjoying the rest of it.

  13. This was a very important lesson in poker back when I was playing seriously. Any money previously put into the pot is not yours. Don’t chase it and don’t let the emotion of that money that once was yours affect the correct decision today. Knowing that made it much easier to fold correctly rather than losing more.

    1. That’s really interesting! I used to play poker casually every week before I switched to a weekly board game night, and even after hundreds of games I still struggled with what you described here.

  14. As a fellow web developer I can sympathize with GoDaddy struggles :) With a WordPress site a manged solution like FreshSites makes sense… but as long as we’re talking about sunken cost fallacy for pure uptime nothing that I know of beats AWS. Tougher learning curve but it’s so nice to have full control!

    1. I’ve run into that with expansions for games. I kinda liked X game and I bought the first expansion, I don’t play it anymore but there are three new expansions that I need to buy so I have it all, even though I don’t plan on playing it.

  15. One gaming/kickstarter related thought I have wrestled with in regards to how to deal with a sunk cost is the marketing budget for a kickstarter. I’ve run one kickstarter, and I included all of the sunk costs into the minimum funding goal for my kickstarter, which resulted in my campaign getting funded much later in the campaign than it otherwise would have.

    I’ve heard other campaigns take the approach of leaving their marketing, video, and other sunk costs out of the minimum funding goal for their campaign, and were counting on reaching well beyond their minimum to cover the costs.

    The question I’ve wrestled with is which (if either) is the best course of action? The reason why I went with bundling it the minimum funding goal is that I was concerned about the campaign being just barely successful and the campaign could end up leaving me in the red.

    However, I suppose that if the campaign didn’t fun with the sunk costs bundled into the minimum funding goal, I’d still be in the red. So now, after talking all this through, it sounds like I did succumb to the sunk cost fallacy. Fortunately my campaign was still successful, but I wonder if it would have been more successful if it crossed the funding goal line earlier.

    1. Thanks for sharing, Jason. I’m not sure there’s a right answer, but I can let you know what I did (and would do if I ran another Kickstarter): I would not include any sunk costs in the funding goal. Rather, I would consider them to be a personal expense that I’m okay with losing in case the project doesn’t overfund. I’m raising funds for future costs, not past expenses. I know it may be hard to view those expenses through that lens, but an upside is that it may help you budget carefully so the marketing and other sunk costs are within your means.

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