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Sunk costs don’t have to sink you

It’s finishing the $3 brownie that turned out to taste like chalk. It’s going to a Mahler concert, even though you hate Mahler, because you had season tickets to the symphony. It’s proposing to your girlfriend, even though you’re not sure you want to, because you’ve been together so long. It’s the sunk-cost fallacy, and chances are, you’ve been a victim of it.

The sunk-cost fallacy is the tendency of people to make decisions based on past costs and benefits rather than future ones. You’ve probably heard of throwing good money after bad: you’ve already put in this much time/money/whatever, and you don’t want to waste it, so you stay in a situation even though you’re not going to get anything out of it. Rationally, this doesn’t make a lot of sense; why put yourself into a situation that will yield nothing instead of making a better choice?

This recent study suggests that we do it more when we’re young. Strough, Mehta, McFall, and Schuller (Psychological Science, July 2008) asked young adults and senior citizens to evaluate how long they would watch a bad movie. Young adults said they would spend more time watching when the movie was one they had paid for, but the older adults chose to watch about the same length of time whether they had paid for it or not.

Strough et al. suggest that this is because older adults are more likely to look at positive aspects of situations, while younger adults pay more attention to negative aspects and therefore try to make up for their “lost investment.”

This argument may or may not hold water–personally, I find myself less likely to spend time doing any uncongenial activity as I get older–but the result is the same, no matter the reason: older adults are less likely to trap themselves in bad situations than younger ones.

This doesn’t mean that all we can do is wait to grow older. Larrick, Morgan, and Nisbett (Psychological Science, 1990) called the principle that we should be obeying–considering only future costs and benefits, not past actions, when making decisions–the sunk cost principle. They found that college students could easily be taught to apply this principle–a one-month checkup after a short training session found the students using it successfully. Essentially, the key is to treat whatever you’ve paid for–a movie ticket, a stock, a relationship–as if you hadn’t paid for it. Would you still want to keep it if it had been handed to you free that morning? If not, then it doesn’t make economic sense to spend any more money or time on it. We, too, can avoid sitting in the rain to watch baseball and keeping money in bad funds when all that’s motivating us is regret over a past investment that’s already irrevocably lost. Sometimes all it takes is a little knowledge.

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