Irrational Reasons to Avoid Change: The Case of ‘Sunk Costs’
At first sight there may be little that the dismal science of Economics can offer to improve our understanding of the human mind – but in fact, Economics has many insights to offer with regard to human behaviour. When reading the work of Nobel Prize winners such as Richard Thaler, for example, it’s not immediately clear if the author is a psychologist or behavioural economist.
One Economics concept that can be applied to human behaviour is that of ‘Sunk costs’. A ‘Sunk cost’ is a cost – a sum of money (and possibly time), that we have invested in a project and which we cannot ever retrieve. A typical example from an Economics textbook might by a firm’s spending on advertising. This expenditure, whilst it might lead to higher sales, cannot, in itself be ‘got back’. Money spent buying a computer, on the other hand, can, at least partially be retrieved, if one later sells the computer on the second-hand market.
The problem here is that psychologically, we find it difficult to cease investing in projects in which we have ‘sunk’ time and money. For example, if we have just spent an enormous sum of money getting our car fixed, the tendency is often for us to decide that we should now get a few more years from it than we’d previously planned. If we’ve spent money on theatre tickets and then don’t feel like going, we are more likely to go if the tickets were expensive and less likely to go if the tickets were given out as a ‘freebie’. This might seem innocuous enough, but should we spend a few more decades of our lives in an unhappy marriage or relationship, because we’ve invested several already in it? Or continue in a job because we’ve spent (sunk) time and money training in that area? What about if we’ve spent a lot of money on a dress or suit that now looks ghastly on us – and that we can’t return or realistically sell? Should we carry on wearing it till it wears out, to make our investment in it worthwhile?
Logic would suggest that continuing as if we’d actually made a great decision is not necessarily the best choice and could often be an appalling choice – yet ‘sunk costs’ explain why we might continue with life as it is – foregoing any of the possibilities that may be open to us. This is not to say that we have to leave our partner, pack-up our job because of one bad day, or dispose of any outfits that we haven’t worn in the last month – but that we should be aware of what we are doing with our lives and the choices that we actually do have, or, in the vernacular of our age, be ‘mindful’.
To arrange a free first session to discuss how to make your life better, contact Jonathan at The Body Matters on 01702 714968.