Sunk Cost Fallacy - A Thinking Error

 Joe Biden is playing with the rotating globe in his desk at the oval office. His critics are hysterically shrieking on the TV screen," by Jove, The US spent two trillion-dollar over two decades on the war in Afghanistan. That's 300 million dollars per day and legacies of four presidents! America can't throw away all that." Biden bides his time and proffers to his aide- "That money is already gone - down the drain. We have lost the taxpayers' money, whether we stay or leave. That sunk cost should not play a role in our decision. A decision to stay the course is not decision-making. A decision to change course is decision-making-by-the-balls. " His aide twists his face as if he bit off a lemon wedge and whimpers a lame "Yes, Mr. President, you are so prescient!     

Sunk cost fallacy is the only accounting principle that doesn't account for today's costs but our past Karma! Sunk cost fallacy is a thinking error. The sunk cost fallacy keeps people for too long in poor jobs, unhappy places, and needless relationships. It perhaps links to our religious dogma - It gets worse before it gets better. The human inability to cut losses and move on is among the primal failures that tie us down in failed mega-projects and drag our wars for too long. The sunk cost fallacy originates from two dogmas of our limited mind- Narrow framing and flawed mental accounting. 

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Most of us would relate to sunk cost fallacy in a stock market. Imagine you need money to buy the swanky new Tesla and will have to sell some stock. Among the stocks you own is stock Zo, a winner with a bright future. If you sell today, you gain a million. However, you have an equal investment in, past its prime, Stock Vo, which, if sold today, you may lose a million. So which are you more likely to sell?

Suppose the problem is narrowly framed as a choice between giving yourself joy or causing yourself depression. The answer is obvious; you would sell Stock Zo and give yourself some hi-fis. However, if you care about your wealth rather than your immediate emotions, you would view the purchase of both stocks as sunk costs. The buying price is irrelevant. The future prospect is of material value. Then, as a rational agent, you would hold the stock that is most likely to do well in the future.

You can see the sunset as an end of a day or the beginning of a night. How one frames the issue impacts the outcome. We generally set up a mental account for every transaction (Stock or a relationship). The sunk cost overwhelms our finite minds with flawed mental accounting. It traps you in the quicksand of sunk cost fallacy and drowns you from taking a comprehensive view. 

A rational agent within us tells us to cut our losses with stock Vo and salvage, but our narrow frame alter-ego hollers at us! "I don't want to be wrong; let me hold out. I at least get to delay the day of reckoning". 

The sunk cost fallacy has its origins in a sinister human emotion -regret. Regret is one of the counterfactual emotions that is triggered by the availability of alternatives to reality. One hears the refrain from one's Mother/Priest/Teacher/Alter-ego " Don't do this, you will regret it later." The anticipation of this painful emotion plays a compelling part in most decisions. Thus, the fear of regret gives birth to the sunk cost fallacy. 

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Four years later, Biden limps back to his office, jaded by reality and burdened with remorse and regret. His bloodied hands start strumming the globe. He says to no one in particular, "We shouldn't have left them in a lurch. There was a more dignified way to exit. Has our reputation has been sullied? Blame it all on my cocky know-it-all aides!" But, alas, the office wasn't oval anymore. 


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