3193: The Sunk Cost Fallacy - Why People Cling to Jobs & Investments Longer Than They Should by Paula Pant

[00:00:00] This is Optimal Living Daily episode 3193 The Sunk Cost Fallacy the surprising reason why people cling to jobs and investments longer than they should By Paula Pant of affordanything.com and I'm Justin Malik

[00:00:15] Welcome back to the Sunday bonus episode where I share an episode from our optimal network covering another topic Today's covering money coming from our podcast optimal finance daily If you do enjoy this episode coming up, please do subscribe to or follow optimal finance daily

[00:00:33] Just search for that wherever you're listening to this But with that let's get right to the bonus episode and Diana's commentary as we optimize your life The Sunk Cost Fallacy

[00:00:48] The surprising reason why people cling to jobs and investments longer than they should by Paula Pant of affordanything.com Imagine that you bought a hundred dollar ticket to a ski resort in Michigan a few days later You find a $50 deal for a ski resort in Wisconsin

[00:01:06] The $50 Wisconsin deal promises better ski slopes nicer snow and an all-around more fun experience on Impulse you buy that ticket too. Then you learn that the two ski tickets are valid only on the same day bummer The tickets are non-refundable and non-transferable

[00:01:26] Other costs are equal. You'll spend the same money and time traveling to Michigan or Wisconsin Imagine that you have no emotional connection to either state no family or friends live there You're faced with a certain loss

[00:01:41] You have to sacrifice either the hundred dollar Michigan ticket or the $50 Wisconsin ticket, which one would you choose? Researchers Hal Arkes and Katherine Blummer posed this question to a team of research subjects The majority said they'd sacrifice the $50 Wisconsin ticket, even though it promised the more fun experience

[00:02:02] Why? loss aversion Most people prefer to minimize their losses even if it means enduring a subpar experience This is known as the sunk cost fallacy People reflect thinking along the lines of this fallacy when they say well I've already sunk this much money or time into it

[00:02:23] I can't stop now Would you spend your last million on a plane? The same researchers divided people into two groups. They posed this question to group a quote Imagine that you're the president of an airline company You have a 10 million dollar research budget

[00:02:41] You decide to spend that money building an airplane that can't be radar detected You spend 9 million developing this plane before you're finished a competitor unveils its undetectable plane Your competitors plane is faster cheaper stronger and better than yours

[00:02:59] Would you spend the last million dollars finishing out the development of your airplane end quote? The researchers then posed the following question to group B Quote you're the president of an airline company. You only have a million dollars left in your research budget

[00:03:17] Someone suggests that you put that million dollars towards the development of an airplane that can't be radar detected However, you know that your competitor just released such a plane You also know that your competitors plane is faster cheaper stronger and better than a plane you could create

[00:03:34] Would you do it end quote? The scenario is the same Sunk cost is the only variable between groups a and B. How did the two groups respond? The vast majority of group a a whopping 80% said yes spend your last million dollars finishing the airplane

[00:03:53] Less than 10% of group B agreed Would you get stuck in snow to justify your $12 ticket? Imagine this scenario a man wins one free baseball ticket from a radio show He doesn't want to attend the game alone

[00:04:09] So he convinces his friend to buy a $12 ticket to accompany him on the day of the baseball game There's a freak springtime blizzard the man who won the free ticket says I don't want to go drive in the snow

[00:04:21] I'm not going to the game his friend. However protests. I don't want to waste $12. I paid for the ticket I want to go the friend who purchased the ticket is not behaving rationally

[00:04:33] The $12 has been paid whether one goes or not it should in no way influence the decision to go only Incremental costs should influence decisions not sunk costs, but who among us is so rational says Arkay's and Blummer would you throw good money after bad a

[00:04:53] Hungry lion crouches near a herd of zebras He's been waiting for more than an hour hoping to catch his next meal The lion realizes he won't catch one of these zebras. They're too far away

[00:05:05] They can outrun him does the lion think gee I've already been waiting for an hour I might as well stick around No, of course not as soon as the lion figures out that he won't catch dinner. He leaves Humans are unique we throw good money after bad

[00:05:23] We hang on to investments that we know are losers in an effort to see if we can break even We linger in careers that make us unhappy since we already put 10 years into this industry

[00:05:35] We heap an additional debt onto our credit cards since I'm already in so much debt an extra $200 won't matter and we force ourselves to finish reading a boring book just because I'm already halfway through the bottom line

[00:05:50] Consider the sunk cost fallacy the next time you find yourself lingering in a job You don't like holding an investment long after the financials justify keeping it or forcing yourself to finish a project

[00:06:02] Just because you started it the time and money you've sunk is irrelevant. Don't throw good money after bad You just listen to the post titled the sunk cost fallacy

[00:06:17] The surprising reason why people cling to jobs and investments longer than they should by Paula pant of afford anything.com. I Loved this reminder on the sunk cost fallacy It can sneak into our lives in so many ways and not just the sunk cost of money

[00:06:36] But sunk costs around time and energy come to mind for me Admittedly, I tend to over complicate things and to get attached to ideas Even when new information begs me to let the idea go

[00:06:49] So for example when I was in the earlier stages of planning the economy conference, which is an event I produce I originally wanted to sell tickets through a Kickstarter campaign

[00:06:59] I thought it would be good for marketing purposes and I know some other people who were successful with Kickstarter on similar projects I did a ton of research. I told everyone about my plans

[00:07:10] I interviewed multiple filmmakers to produce an awesome video and overall was pretty attached to this idea However, it was going to be a huge investment of time and money and through exploring the idea further

[00:07:24] I discovered there were multiple reasons why it might not work out as well as I originally thought It was a tough decision to make but I ultimately ditched the Kickstarter plan and just opened up ticket sales through a vent break

[00:07:37] It was a difficult decision because I was so invested in my original idea And I was tempted to dismiss all that I had learned along the way and just do the Kickstarter anyway But in the end, I'm glad I didn't let the sunk cost fallacy drive that decision

[00:07:52] That should do it for today have a happy rest of your day and I'll see you tomorrow where your optimal life awaits