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That Sinking Feeling

Sunk Cost Fallacy

As we put a bow on 2016, one can’t help but reflect on the past year.  We remember loved ones lost and cherish those still with us.  We look introspectively at our careers & relationships.  I think about my accomplishments – some.  And my shortcomings - more.  We look to the coming New Year with a (hopefully) freshened outlook and vigor.  Where is room for improvement and how do we get there? After all, our lives are nothing but a cumulative portrait of decisions. If we improve our evaluation of potential options, better outcomes ensue.  One of the most detrimental cognitive biases we engage in is the Sunk Cost Fallacy (SCF).  This doesn’t affect just finance, but our health, recreation, relationships, careers – most aspects of our lives.  We just don’t always realize it.

The Sunk Cost Fallacy is simply reasoning that further investment is warranted due to the fact we’ve already committed resources to a seemingly lost cause, poor investment or negative experience.   The most common SCF is in finance – we invest good money after bad.  “I’ve lost so much money on this investment, I can’t sell now: in fact, I’ll buy more.”  Cost basis (taxes notwithstanding) should play no role but it’s erroneously the driving factor.  Professional investors/traders are completely agnostic about acquisition cost (past) and only look at the future prospects.  That’s not to say you automatically abandon every underwater investment.  But be objective and judiciously evaluate its outlook.

How many of us have been in a lousy sub-par relationship?  3 weeks becomes 3 months becomes 3 years.  This emotional outlay has no pay off but we embrace the struggle anyway.  Loyalty is one thing; gluttony for punishment is another.  It’s similar to going to a bad movie.  20 minutes in you sense this is no It’s A Wonderful Life or Road House - but you keep watching and double down on the popcorn.

What about our health & diet? As holiday overindulgence gives way to angry waistlines we staunchly line up New Year resolutions.   But when we go to clean out our calorie clogged pantries, we think that would be wasteful.  Those Chips Ahoy are bought and paid for.  Not exactly brain food; we eat them anyway.  How about at a restaurant:  dreadful food but we still clean the plate?  Big, Catholic families are the usual culprits.  Mom always said there are starving children in Africa.  True, but I’m not convinced she really understood the logistics of refrigerating bad meatloaf for 6000 miles.  They’d probably return to sender anyway.

Ok, so if SCF is bad, why do we do it?  Probably, similar to Confirmation Bias, we strive for consistency. Consistency = credibility.  We don’t want to cancel a project halfway thru – that looks flakey and indecisive. We frown on contradiction.  Selling a poor investment is admitting defeat.  Instead, tenacious resolve is virtuous & keeps up appearances. 

But sometimes a little tenacity can pan out.   Personally, Michelle played hard to get with me.  After initially meeting, she never returned my calls.  My self-esteem was bruised but not beaten.  Short of stalking, I was further intrigued:  who is this Ginger Grant and why is she blowing me off?  But ultimately, she proved to be no match for rugged looks & Irish charm.  Almost 20 years to the day, she continues to reap dividends from my determined & passionate investment.  Truly a Festivus miracle.


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