How the “Sunk Cost Fallacy” Keeps You in Bad Relationships
And how to recover.
I spent a lot of years working on Wall Street. It was the perfect place to watch people and how they behave.
I remember one client in particular. He loved a certain stock, an asian paper company. He held a huge position already and every time that stock price dipped, he bought more.
On Wall Street, they call that dollar cost averaging. You own 100 shares at a cost of $50 per share. The stock dips to $40 and you buy 100 more. Now you own 200 shares at an average cost of $45. It is a good idea if that stock is solid and likely to increase in value.
But what this guy did was insane. He bought more at $45. Then at $35. And $25. And down and down and down. It hit $1 per share and he doubled down. He bought 90,000 shares at $1.
And then it got very ugly. That stock slid all the way down until it was worth a penny a share. It was not even worth the paper it was printed on.
How We Fall For It
In economics, it is called the “Sunk Cost Fallacy”. Throwing good money after bad. We like to think of ourselves as rational beings. But in fact, we make decisions all the time that have no basis in reality.
We allow the emotion of a situation to take over. The ego rules. We want to have made the right decision in the past. Rather than admit a mistake, we invest more in a failing situation. So why do we do it?
- We hate to admit failure.
- We want to justify our investment.
- We fool ourselves into believing things will be different.
- We are focused on past investment rather than present and future value.
People have a tendency to push forward when they feel they have invested resources that cannot be recovered. We sit through movies because we already bought the ticket. We eat too much food at a restaurant because we over-ordered. We waste our time making ourselves feel better about the past when we could be building a future that matters.
The Economy of Love
Falling prey to the sunk cost fallacy is a psychological trap. When we have invested resources and time but have not yielded the expected result, we double down. Try harder. Invest more.
The problem with that thinking is that we waste more time and more resources trying to correct a past mistake.
It looks like staying when you should have left long ago. The signs were all there. Maybe for a very long time. But you hung on to that relationship thinking, but I have put in so much time and effort.
Self-confidence becomes as a shield. You start doing things to support that bad relationship and make it look good. Think of all those cute Instagram couple posts. You scroll past thinking, they do nothing but fight.
What are they thinking? By sticking with this unhappy relationship, I will prove that I was right all along. I didn’t waste my time. Let’s cover up the truth and just make it look good to everyone else. At least my ego will be soothed.
How to Recover the Ship
We need to learn how to think differently.
Instead of evaluating our relationships based on their merits in the present and what the likely value will be in the future, we base our decision on what we have already invested. We choose unhappiness in the present rather than admit the truth about the past. But if we can become better reasoners, we can make choices that actually bring us the future we want.
- Realize that past investment is exactly that. Your time cannot be recovered no matter what happens next.
- Ask yourself, if you were starting over today, would you choose this person again?
- Think about what the likely future with this person looks like. Is that the future you really want?
- Think about a time when you have left a relationship in the past. Is that a relationship you wish you had back? Probably not.
By admitting that the relationship is over, we can stop wasting years of our lives doing things that actively make us unhappy. The ship sank. The loss is unrecoverable. In acceptance, we can move forward knowing recovery of that time isn’t possible.
You grew. You learned. You became exactly what you are now. A better version of you.
I always felt bad for my client with the paper stock. And every time I think about fixing a problem that requires a huge investment of resources, he pops into my mind.
Because his stock never recovered.
He called every day looking for news, some sign of hope, some report that would make the past mistakes disappear. It never came. Those phone calls made me really sad but they taught me a really important lesson. Failure is always a possibility. It can be our best teacher if we are listening.
I like to think he never did it again.
