There is a half-used tub of conditioner in my shower which I hate using. It smells like a bad egg, yet the scrooge in me will not allow me to throw it out. The cost of the remaining product is probably by now a rounding error on my budget and pales in comparison to what I will sometimes spend on a bunch of flowers or a takeaway. It is no longer a rational decision.
Had I been living in the Great Depression, it may have been a rational decision, but I am not. I could easily fit this expense into my budget, and my behaviour certainly doesn’t align with my other (rational) money decisions.
It is a good example of a decision driven by the sunk-cost effect or bias - the tendency to continue an activity once you have spent money, effort, or time on it. This can apply to military operations, projects, investments, relationships, social endeavours, and even letting go of a conditioner! You can probably all think about disastrous overbudget IT projects, public-works programs or military campaigns but it applies equally to our own lives. It applies to our daily spending, our investment strategies and our long-term relationships. It can be very difficult to stop an insurance policy you no longer need because you’ve been paying all along, to go against bad advice you paid for, or to sell investments that have fallen in value.
Often this sunk-cost effect can cause us to double down on a position or a view, continue to buy lower into a losing company, or escalate commitment to projects.
We can explain the sunk-cost effect by our tendency to avoid losses more than we seek gains. Our leaning towards justifying our past decisions or not appearing foolish may also play a role. In my case, I don’t like to appear wasteful – my early years on a Karoo farm where everything was scarce still impacts my financial decisions. That is, if I’m not mindful about my decisions.
Ideally, when we make decisions, we should not think about the past, other than to learn from it. The cost price of an investment, the money already spent on a project, or the time and effort put into a long-term career or relationship should not rationally influence our decisions. Every day we should wake up thinking that we start a clean slate. If a decision needs to be taken today with a fresh perspective, and new insight, backed by the best data, what will it be?
The sunk-cost effect is also driven by thoughts of the future – the pain we will feel when we lock in a loss, or when we must admit failure. We may fear the regret of making the wrong decision in the first place. Research shows that emotions such as anger and anxiety are highly correlated with the sunk-cost bias in decisions.
While I have been pondering throwing out my conditioner, I came across a piece of scientific research on how to counter this effect in our lives and interestingly, the research focussed on using mindfulness as a counter to this bias. Mindfulness meditation – the practice of learning to focus on the present instead of the past or future by focussing, for example, on deep breathing - has repeatedly been shown to combat anxiety, and is linked to greater happiness. But this research also shows that mindfulness practices can help us make better money and life decisions. The research found that mindfulness meditation can reduce the impact of negative news, the emphasis of negative information relative to positive information when seeking the right information for our decisions and increase our resistance to the sunk-cost bias.
This research inspired me to again focus on the present – it’s the only time we can control. And to practice mindfulness in my decision making. Viewing our decisions from an objective perspective, with curiosity, compassion and without judgement, can help us to improve all our decisions. But, as with most good practices – it must be a practice. The good news is that the research also shows that we get better at countering the sunk-cost bias with age – proof that practice makes perfect.
Time for that new fresh-smelling conditioner!
Ps. I love to hear your comments. If you are not on our mailing list, you can subscribe to receive this blog every week on our website www.foundationsa.com.
I'm taking a break from blogging next week, but will return the week after.
Kind regards,
Sunél
//25 March 2022.
