Have you ever heard of the sunk-cost fallacy?

I hadn’t up until about two years ago when it was detailed to me through Instagram of all things. One of the key parts of business, a key part of life, not just success, being taught via Instagram. Not at University, not at school. Social Media!?

The sunk-cost fallacy is applied to everything we do. Life, love, relationships, work, study, sport, hobbies, our jobs, our businesses…the list is endless, but in everything we do, we invest something. Whether it be money, effort, or time (as examples).

The basic concept of the sunk-cost fallacy is that once we invest in something, we keep investing as we feel the need to do so. Otherwise, we’ve failed. As humans, we don’t know when to give up. When to say enough is enough. We keep going until we can literally do it no more. We’re taught to do this, it’s not a natural occurrence. It’s the world we live in. So how do we change this? Well, we learn what it is to start with…

Now take a gambler, this is the easiest and quickest way to get your head around how this operates. This will be an extreme example, but put yourself in their position.

The gambler goes to the roulette table and puts 100 on red. They win, great, 200. Now they place 100 on red again and 100 on the third row. They win the row, but it’s black. Now they have 1700 (not bad, and I think most of us would walk away). They now bet 1000 on red, but black comes in. 700 – they are still 600 up. Instead of walking away, they want to get back to 1700. They bet 200 on one row, 200 on the 1st dozen, and 200 on red. None come in. Now at 0…but they keep going. Eventually, they are 1k and a fair few martinis down. Now as mentioned many of us walk away at some point, but equally many of us don’t. We’ve seen the riches and want them, so we keep betting in the hope we can return to 1700. But as soon as that first loss occurs, as soon as you are back to the original 100 – we should walk away. Why, because we only had 100 in the first place.

Whether it’s gambling, relationships, business, or whatever example you want. We all invest continuously as we believe we deserve success. Sometimes things, simply put, aren’t meant to work out. But if we learn from this, it’s not a failure. We can use it for future success in some other aspect of our life.

Let’s look at another prime example Mr John DeLorean. Leaves a cushy job at GM to set up his car manufacturer. I can do it better than everyone else, and I want to build a car that excites. I will build better cars than GM and am not just a ‘bean counter’; this is my vision! We’ll have huge success, and I will name the business after myself (the first warning here is that the decision was not made for pure business reasons…Ego?). We all know what happened (not Back to the Future – the failure), but DeLorean took loan after loan after loan and eventually only built 9000 cars and ended up filing for bankruptcy with $17 million of debt. DeLorean was a well-respected GM exec whose ego took over but not just that, he was so focused on succeeding with a failed project that he didn’t see the wood for the trees. He spent more and more money, time, and resources trying to build something that should never have gotten off the ground. It took ten years to get the project off the ground – this was the first red flag. Yes, we have an iconic car (now), but the reality is, the car was badly built and incredibly expensive for what it was. In total $100 million of investors’ money was lost, 2500 jobs, and DeLorean ended up in court (and was acquitted) of trying to smuggle $24 million worth of cocaine into the US.

There is nothing wrong with having a vision, but that vision needs to be realistic and cannot be led simply by our ego. We must act with logic, not emotion. DeLorean was emotionally connected as well as financially. His name was on the product. It was his vision. He wanted to succeed. He had taken huge sums of money from investors. While I am unsure if he would realize the faults if he were to go back to review what occurred (he tried to restart the business many times), I am sure many of us, from the outside, can see the issue.

Success is not a given. Just because you throw time, money, effort, and love into something does not mean it HAS to work. You simply must HOPE it does.

What I say in these situations is to place yourself in a helicopter above yourself. Remove emotion, remove ego, remove YOU and give yourself the advice you need and take it. No matter how hard it is. We are logical creatures; simply, emotion takes control all too often as detailed in the world-famous book by Prof. Steve Peters – The Chimp Paradox. If we want to look into Ego and how it affects Sunk-Cost – well, look no further than Ryan Holiday’s – The Ego is the Enemy in which he looks at Stoicism and many other individuals who fell victim to Sunk Cost Fallacy such as Dov Charney (Founder of American Apparel).

How about we look at a more recent case? In the UK we could look at Arcadia, Debenhams, Monarch Airlines, or…the Concorde. The Concorde was of so much relevance that Sunk Cost Fallacy is often referred to as the Concorde Fallacy! Two governments, hand in hand, spending billions on developing a supersonic airliner. Both didn’t want to lose faith or let the other down. Yes, the result was a technical masterpiece and an amazing feat of human engineering, but it was NEVER going to pay for itself, costing both countries huge amounts. To recoup this, a trip to NYC costs almost £8,000 – in 1997. In 2021, that’s the equivalent of £15,000. I’d much rather get a business class return and have £13,000 to spend in NYC than say I flew on Concorde thank you because that is all it was when you purchased a ticket. You could say you had flown on it. It made you instantly more attractive. Ok, I lie, it didn’t make a blind bit of difference apart from the 15 minutes you got to talk about at a meeting.

There is no doubt that the Concorde was and remains beautiful. A masterpiece in the sky and a real marvel. I was lucky to see and hear a few as a child and I will never forget the sonic boom. But was it worth it? The cost far outweighed the return.

If we go back, look at us individually and why I am talking about this.

For me, I have always invested heavily in my personal relationships even when they aren’t working. I have always believed inherently that people are good, and you get what you give. But this isn’t always true. I can sit there and think, what is the point, but I will continue to invest because I have already invested too much. I know it’s my downfall, but it’s tough to change at 35. However, with the knowledge of this, I have been able to take small steps towards walking away. Maybe later than I should, but I will still walk away.

The same can be said for your job, your careers, and your studies. I went to Bournemouth University, hated my course, and felt like a failure when I left after one year. I had a mad year, lots of fun and way too much money spent on things I shouldn’t have spent it on. I returned home to a relationship and my parents and had a great three years.

At the end of my first year back home, I knew I had made the right decision. My life was better, and I had walked away from something I didn’t want to do. I quickly knew I hadn’t failed; I had learned. I was lucky my parents supported me (after a little time). They lost money due to my behavior. I did the same at A-Level walking away from Maths, which was my only ‘proper’ subject because I wanted to focus on others. I increased my grades in the others. I knew focusing on Maths would be a sunk cost without knowing what a sunk cost is. I wish I had the strength of will I had back then, but now we all have expenses meaning we cannot simply walk away. But can we???

Look at your life, think of what you invest in that you don’t wish to? Relationships, friends, work, health, sports, hobbies…is there one thing there that you think: You know what, I have had enough, I am investing unwisely there.

Let’s look at your career and more precisely your job? Do you feel underappreciated but stay because you have spent so long there? Do you stay because you have expenses and others rely on you? Does it feel like if you leave, a new job may not work out or it may take time to settle again?

Take the worries away and ask, am I investing in something that is not giving me anything back other than finances and security? Now take those away. What is it giving you in return? Write them down and put ticks and crosses next to them. If you have more crosses you know it’s time to move on – otherwise, you are investing unwisely and are falling foul of Sunk Cost Fallacy and Fear. If you leave, you are not a failure; you have learned more about what you want in your professional life. Maybe you simply do not enjoy the career path you are on.

Man who work for passion richer than man who work for money.

Mr. Miyagi

What about studies? You hate the studies but know you need them to get to the level you wish. Ok, that’s a worthwhile investment but only if you can pass them. Once they are done, they are over. But if you hate them, is this the right career for you because the likelihood is that they will form part of the rest of your life?

I work in Finance Recruitment so speak to people who fail exams time and time again. It’s just not working. They may not be fully invested because they don’t want to do them. If you are an employer, continuing to pay for these failures, are you falling foul of the fallacy? You want them to succeed, but the reality is they just aren’t going to get there because, truth be told, they aren’t fully invested. With a growth mindset, they should be focused on growth and development, but they are sitting in a fixed mindset and aren’t growing or developing as they have invested as much as they want to. Therefore, it’s time to call it quits.

We are all culpable of this – the only reason we are there is for a paycheck and stagnation has occurred, but we like it there so we keep taking the exams, we keep working away, we don’t want to tell the boss – I have reached my peak and I’m quite happy here – as it will feel like we have let them and others down. Again, emotion is involved. The fear of failure, just fear itself, plays into the hands of the sunk cost fallacy.

Let me again take a personal example. When I started in recruitment, I made the statement – you only go into recruitment if you want to run your own business. I still stand by this. Have I always enjoyed the job – HELL NO. Do I always enjoy it now? No. But do I enjoy everything that comes with it when the times are good? Yes. I enjoy talking to and assisting people. The financials help, but over time, I learned they weren’t the be-all and end-all (although now they must be a key consideration!!).

I worked for some major businesses. I hated KPI’s. I hated figures on boards. I just wanted to work with those I wanted to. Help them, and hopefully assist them in their careers. Therefore, the bigger companies weren’t for me. I took a year away; during that year, I was supposed to start a business with a friend, but a sinkhole opened, and, well, my investment went down the sinkhole. Another relationship ended, and I went to Asia for some time to think.

A friend joined that business, now a year old, with a lot of promises. Over the next six years, they helped to build it, invested their time and value into said business. Three years in, a major change occurred with the launch of another business and further investors. They raised fears with me but more incentives were on the table, although the old ones had been taken away… Alarm bell hey? For some reason, they stayed, but this is because they had already invested so much. They continued to invest everything into the business. It took an emotional toll as well as physical and mental. The next 12 months were of real concern due to internal politics. Five starters and subsequently six leavers. But they continued to invest and invest and invest. Things then came to an end with the ‘external problems’ to blame. But the reality was – their time was up. They needed the cord to be cut. When discussing it now – they only stayed due to the investment they felt they had made into the team, the business, and their clients.

One of the key parts I love about my job is that I now give advice and assistance to as many people as I can. I have calls daily from those I can’t help from a recruitment perspective but if someone takes the time to call me, I will at least try to advise them so they don’t make the same mistakes that me or my friend made. Not only that, but I also like to pass out little nuggets of information I have taken from what I have learned over the years. If someone starts a job and has concerns, I will take time to listen to them and try and help them before they fall foul of the sunk cost fallacy. At the start of a new job, you need to invest fully, but if that investment returns nothing after 6 or 12 months – well, you know the truth. Don’t invest anymore; otherwise, you will continue to invest unwisely.

So – by the end of this, we got to recruitment, careers, jobs, etc. Plus, you know a little more about me. That’s what these blogs, articles, whatever you want to call them are about. They are here for you to learn about the human side of Elusive. You may not like that side, which is fine, but if you have taken a little bit of information that helps you in the future, I really hope it allows you to make the changes you need. That may sound like an egotistical statement, but I don’t really care as I know – knowing about all this has helped me and changed my life. I want to empower you. If you didn’t like it, I’d also ask how you got this far! If you don’t take it on board, it says more about you, and I would advise reading Mindsets by Dr. Carol S. Dweck.

I can guarantee you’ll look back one day and realize that at some point you invested too much in something you shouldn’t have, and at that point, I hope that little bit of growth spouts success elsewhere.

D

P.S.

Where did I learn about this?

James Smith – Read his books
Ryan Holiday – Read his books as well
Google – search it

Further reading:

https://thedecisionlab.com/biases/the-sunk-cost-fallacy
https://www.lifehack.org/articles/communication/how-the-sunk-cost-fallacy-makes-you-act-stupid.html
https://time.com/5347133/sunk-cost-fallacy-decisions/
https://en.wikipedia.org/wiki/Sunk_cost
https://www.researchgate.com/publication/228471310_The_Sunk_Cost_and_Concorde_Effects_Are_Humans_Less_Rational_Than_Lower_Animals
https://www.bbc.com/worklife/article/20180914-the-trick-to-learning-when-to-cut-your-losses
https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/