The lifelong lesson of sunk cost

It’s the last day of the year – always a good time to reflect on the months that went before. We all do this: we look back, we reminisce, we try to learn from the past. Except, most of us just don’t. We let the past enslave us, not teach us lessons for the future.

Don’t believe me? Try your hand at the following conundrums.

You’ve just started watching a long movie at the theatre. Twenty or so minutes in, you realize this particular film is already very tedious, not to your liking at all. But you’ve paid for the ticket, and it was pricey. There are still more than two hours to go. Do you stick it out, hoping it gets better? Or walk out now?

You’ve been in a close relationship for a long time. It gave you great happiness in the early days. These days, however, your partner has turned abusive and is often unpleasant. You sometimes wonder whether you should move on. But you’ve been together a long time. You’re invested. You have great memories. You can’t just walk away, can you?

Your countryfolk have a revered old leader. This person has fought for the nation, made sacrifices for all of you. You all feel you owe this leader, big. As the boss ages, though, you’re feeling a little queasy. He’s making mistakes, missing a few tricks, losing concentration. Perhaps it’s time to think of a future without the venerable old fellow? But that would be deeply ungrateful. He’s done so much for everyone. Let nature take its course, no?

For most people these are not conundrums at all. Most people would keep watching the movie; would stick out the relationship; would not do anything to unseat the long-standing leader. This is because most of us suffer from the sunk cost fallacy. Once we have invested – time or money – in something, we become chained to it. The more invested we feel in something, the harder it is to abandon it, even when all rational evidence suggests we should.

This is because we allow our decisions about the future to be guided by costs we have incurred in the past. Actually, we should be putting the past behind us and considering the future on its own merits – the costs and benefits yet to come. And the way to do that is to ask yourself this: what would I do if I had not incurred any past costs in this matter?

Would you watch the movie knowing what you now know, had you not paid for it? Would you begin your relationship knowing what you now know about your partner? Would you vote for the old leader on his merits today if he were standing for election for the first time?

If the answers are all no, then you know what you have to do. Stop suffering in the future because of costs already incurred in the past. The sunk cost fallacy keeps us eating bad meals, using outmoded IT systems, holding on to pasts that are already gone.

This is an enduring lesson in business strategy as well. Andy Grove, legendary boss of Intel, once faced a quandary. The Intel of the time was heavily invested in memory chips; but the future was thought to lie in microprocessors. The memory division was huge; the microprocessor one tiny. The former was demanding more investment, not less, so that a new cutting-edge memory chip could be developed.

Andy Grove asked his then chairman, Gordon Moore: ‘If we got kicked out and the board brought in a new CEO, what do you think he would do?’ Gordon reportedly answered without hesitation, ‘He would get us out of memories.’ Andy stared at him, then said, ‘Why shouldn’t you and I walk out the door, come back and do it ourselves?’

The rest is history. Intel got out, and went on a phenomenal run, dominating microprocessors for decades.

Don’t get me wrong: this is not wholesale advice to cut and run. You still have to weigh the future costs and benefits, after all. Could your movie turn out worthwhile after a turgid start? Is your partner just undergoing a temporary crisis, one which can be addressed through understanding and counselling? Is the old leader still the best option available? You have to force yourself to think clearly, free from the emotions created by past hopes.

The life lesson is this: if all you’re doing is digging yourself into a hole, it’s time to stop digging. Don’t think about all the effort you’ve already expended digging. If there’s no future for you in the hole you’re in, haul yourself out.

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