In-depth articles, series and guides
A few weeks ago, after a couple of rounds of discussion, my wife and I cancelled a financial investment that no longer made sense in the long run.
It was not an easy decision because the investment was locked to a time frame, and withdrawing early cost us a hefty penalty — around 10% of the investment amount.
Also, this wasn't the first time we had considered pulling out of this investment.
We had the same dilemma of whether to continue investing in the fund or withdraw from it last year, but we scrapped the plan when we calculated the premature withdrawal fee. It was not an expense we could write off without batting an eye.
Indecisions like these arise from what psychologists refer to as the sunk cost fallacy.
The more we invest in something, whether through time or money, the harder it is to withdraw from it.
While this sometimes works in our favour by helping us resist a hasty and potentially wrong decision, like panic-unloading stocks during a market fluctuation, it often compounds more losses in the long run.
Pause and think of the last time you kept pouring time and money into a project that wasn't going anywhere because you had already invested so much.
You were too deep in the hole with no visible outcome, but you kept digging because you had worked hard to get this far, and it would be a waste of your efforts to give up now.
To illustrate it further, here are a few daily examples of where the sunk cost fallacy influences our actions:
- Sitting through a movie you don't like because you've already spent an hour watching it, even if that means wasting another hour of your life.
- Reading a book you don't find interesting because you have already paid for it, and there's no scope for a refund.
- Sticking to a futile approach to solving a problem at work because you've already spent the last three hours exploring the issue through this angle and don't want to lose more time starting a new solution from scratch.
Humans have a loss-aversion mindset.
We underestimate our future gains in our pursuit to minimise any present loss. This is a dangerous terrain because it sets us on the wrong path.
For example, if I had continued investing more money into the fund I exited, I would have made significantly less than a conservative 6–7% yearly return from a regular index fund.
Even though this course correction meant I lost some money now, a sunk cost, it's negligible to what I stand to gain over the next 10 years by reinvesting the money in a better financial instrument.
Life's unpredictable, and while we can estimate to some extent how our decisions or investments will turn out in the future, we can never be sure.
When a change is needed, ruminating over our sunk costs prevents us from making timely decisions that could work in our favour rather than against us.
Imagine this:
Instead of pouring more of your time, money, and energy into something unlikely to bear any fruits of your labour, what if you let go of what's lost and redirect your resources to something with a better chance of working?
Walking away from what you've already invested feels painful, but staying invested on the wrong path hurts more over the years.
To ease the pain of lost time and money, reshape your mind to think about what you stand to gain rather than what you'll lose now.
For example:
By cutting further time commitment on something that isn't working for you, you can free up time for an opportunity that might save your business or reshape your career.
I often scrap complete drafts of blog posts because they don't turn out how I expect them to, and I don't see a way to tweak them to be worth someone's time. I feel uneasy deleting a 1000-word document which took 2 hours of my time to write, but redirecting any further time and effort to work on a different, promising blog post instead of beating a dead horse is far more lucrative.
So:
Recognise these hidden sunk costs in your everyday life, and don't be afraid to let them go for a better opportunity.
Ask yourself:
Am I holding myself back because of a sunk cost?
