Sunk Cost

Say you paid 10,000 won (about $7) for a movie ticket, and twenty minutes in, you realize the film is terrible. Many people hate to waste the ticket money, so they force themselves to sit through the whole two hours of a boring movie.

But the 10,000 won you already paid is gone whether you walk out or stay to the end. When you cling to money that has already vanished, you end up stressed by a dull film and waste the precious remaining two hours on top of that.

The wisest move is to ask only this: “Will leaving now do more for my mood and my time than staying?” Forget the past money you can't get back, and choose to protect the free time you still have in your hands today.

Piling dessert onto your plate at an all-you-can-eat buffet when you're about to burst, just to “get your money's worth,” is the same thing. The money for the meal is already spent. Forcing down more only adds the cost of antacids and hurts your health.

Economics teaches that when you make a decision, you should treat costs already spent as if they never existed. You make the most rational choice only by comparing the “new costs” and “new benefits” that come from what you pick from here on.

But people tend to feel a loss more strongly than a gain of the same size. The moment you give up the money or effort you've put in, you have to admit to yourself that your past choice was a failure. Pride that won't admit a mistake, plus a hatred of losing, combine to produce an irrational decision.

That's why business owners pour more money into ventures with no hope of success, and drivers keep repairing a broken used car and spend more on fixes than the car is worth. Trying to win back an earlier loss and causing a bigger one instead is called the “sunk cost fallacy.”

The Concorde, the supersonic passenger jet developed jointly by Britain and France, is the classic historical example. Development costs ballooned to several times the first estimate, and forecasts said it would be hard to turn a profit. But both governments hated to waste what they'd already poured in, and they couldn't stop funding it. The Concorde flew from 1976 to 2003, yet the huge development bill was never recovered. That's why the sunk cost fallacy is also called the “Concorde fallacy.”

The sunk cost trap hides in the smallest moments of daily life. You stood in line for an hour at a popular restaurant, so you choke down a terrible meal. Or you hate to waste the time you've spent studying, so you give years of your youth to an exam that doesn't suit you.

To climb out of this swamp, ask yourself one very simple question when you decide. “Leaving aside the money and time I've already put in, if I were choosing whether to start this today, would I make the same choice?”

If the costs ahead are bigger than the benefits ahead, stopping is the better deal. The money, time, and sweat you've already poured in will never come back, no matter what magic you try.

You can't change what's passed, but you can change the future ahead with the choice you make now. Not letting past regret trip you up, and looking only at future happiness and possibility, is the real wisdom economics offers.