Trap of the Sunk Cost Fallacy
A dangerous mental error that takes your life and money away right under your nose
The Sunk Cost Fallacy literally controls every aspect of our lives, yet we don’t know about it. Today we’ll deep dive into it. I have all this for you:
What is Sunk Cost Fallacy? (skip if you’ve read my thread)
How do you stop Sunk Cost Fallacy? (skip if you’ve read my thread)
How do startups use Sunk Cost Fallacy to their advantage? (Newsletter exclusive)
What is the SUNK COST FALLACY?
Whenever sunk cost kicks in we give the cost more value than anything else. When the cost is money, we are willing to give up our time for it. When it’s time we’re giving to waste our money on it.
Whenever sunk cost kicks in we give the cost more value than anything else. When the cost is money, we are willing to give up our time for it. When it’s time we’re willing to waste our money on it.
Let me explain these with examples:
You bought a course and it sucks, but you still consume it completely because you’ve invested your money in it.
You give up your time, to “protect” that money.
You went to the mall but the shop you wanted to visit was closed.
You shopped at other stores instead because you had invested your time to reach the mall.
And that made you waste your money on something you didn’t intentionally want.
When we leave school and choose a course at 17-18, we invest a lot of our parent’s money in it. What if we don’t like that course?
Now we keep doing that course, we get that undesired job, we keep investing our valuable time again and again to make sense of those initial costs.
Imagine suffering for 20-30 years of your life, just for that initial money. It doesn’t make sense, but when you don’t zoom out, it completely does in the short term.
That’s why I called this a “Dangerous mental error”.
It’s better to suffer through the guilt of wasting that time, effort or money on sometime rather than suffering through the entire process for years.
This mental error doesn’t let you give yourself a chance by sending you directly in regret minimisation mode.
Sometimes we have to take the punch of regret, in order to stop our life from being wasted.
After a point it’s important to understand what’s gone is gone. It’s never coming back!
And even if you take out every inch of worth from the item, it’s going to bring you no more pleasure.
Quitters win in this world because they know when you leave.
Quitters get over the Sunk costs quickly in order to make the correct decisions for themselves.
Years of educating yourself for this one outcome, which was your own choice, which was meant to be your passion turns out not good enough for you.
We think our life is a straight path towards happiness and fulfilment when in reality it’s dive into the randomness.
Try to charter your territory, you’ll still come out with an uncertain outcome.
Because life in it’s truest nature is uncharted.
Doing a certain thing won’t necessarily give you a certain outcome.
So, don’t make your happiness about that outcome.
You worked on something you didn’t like for a while, but you always gained some experience from it.
It’s good to experiment on new stuff now.
That knowledge and experience will always come in handy when you look back to connect the dots.
How do you stop Sunk Cost Fallacy?
By identifying what you might be losing on and understanding opportunity costs.
Suppose you’re in a relationship but it sucks and you’re literally suffering in it…why don’t you leave her?
Because you’ve invested 6 years of your life in it. Okayy that’s very sad awww…but here’s the thing:
What if you get out of it today.
You can get in contact with so many new people and maybe find the one who actually makes you happy.
It’s an opportunity cost that you’re bearing by staying back man!
Kahin pahuchne ke liye kahin se nikalna zaruri hai nahi toh gile shikvye reh jate hain.
Regret at 22 of losing some money, relationship, or energy is much cheaper than regret at 70-80 of not getting out at the right time.
How do startups use Sunk Cost Fallacy to their advantage?
Sunk cost is a good tool which startups use to decrease the “value realisation” of their offering.
Once you’ve made an effort to maintain a streak inside one app, you’re more likely to continue it for a very long time.
The risk for a startup comes when people get over this sunk cost. Once you’re over it, you’re never coming back.
If I break my streak, I won’t care about it much because I understood that the thing which was keeping me there was my previous effort’s investment, not the value in the product.
Sunk cost is a great way to make you stick without moving over to the competition.
For example: I’ve bought Amazon’s prime subscription for an year to watch my favourite series.
Now I tend to use Amazon for all my purchases over any other e-commerce because I made that initial investment.
Amazon has built this wall around me which doesn’t let me go anywhere else.
Unless you make the users invest something in your platform, they won’t stick to it.
It can be subscription money, coins, or even time.
I’m less likely to switch to any other music player because Spotify knows my music tastes now.
I’ve invested my time to train that algorithm, and I don’t want that effort to go in vain.
Or it can also be like making people buy something big, and then making them use that thing again and again and paying small amounts regularly.
Like Kindle!
You buy a kindle and you have to buy books from Amazon or their Kindle Unlimited subscription.
Once you’ve invested a huge amount of money to buy the device, it’s easier to make you pay for the subsequent things to realise the full value of the larger purchase.
And that’s a wrap!
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I heard about this first time in Prof. Gilbert's MITocw course.
And I could relate, because having brought the Kindle device(5k) from my first ever earning, I felt it was not worth...and wanted to resell it.
The mistake I did was wanting the entire or close to 4.5k , as I could not get over that cost, and couldn't sell too, as it was a bad deal for others. If I could have considered the marginal cost and anything above it would have been worth.
Love your point about how companies use it.