Emotional Sunk Costs

Some of you might be familiar with the concept of sunk costs in the context of economics or business. What it means is that once some investments are made and you can’t get them back these costs shouldn’t affect your decisions anymore. In practice this means, just because you already invested 100 000 € in a failing company that doesn’t justify investing more and more money in it. It’s rational to decide if it makes sense to invest in the company independently if you invested in it before or not.

An example outside of business is going to a bad movie. If you realized ten minutes after the start that the movie is bad you face the following decision. Either leave now and do something more interesting in the next 2 hours or watch the movie even though the beginning seems bad. The right way to think about this is asking the following:

Will I have more fun watching the movie or going doing my best alternative opportunity. Best alternative could be anything from going to a bar and meeting a friend or watching Netflix at home or calling your mother. The crucial aspect here is that this question doesn’t consider how much you have paid for the movie. Why?

Because it is irrelevant, rationally speaking. The money is gone no matter if you watch it to the end or not.

However, most people don’t discard the fact that they just paid 15€ to watch this movie. They will be reluctant to just leave the movie after 10 minutes. Why?

Because this would make their past decision, deciding to go to this movie in the first place, feel like a failure. It feels like you just lost 15€. What we should be thinking about is the future (is it a good decision to leave now or not) but what we are thinking about is the past (did I make a good decision or not with going to the movies). Okay you might agree with that but what the hell does this have to do with emotions now?

The reason is that we commit the same sunk cost fallacy with our emotions. For example in a lot of cases you might not want to take responsibility for something because it feels like being guilty. For example, you behaved badly towards a friend who needed your help. You might rationalize the behaviour by explaining to yourself and others how stressed you have been or what a bad day you had. Maybe you might not really think about it a lot to avoid feeling guilty about the behaviour. Both ways of dealing with the situation have in common that they are concerned with the past, not the future. When you rationalize your behaviour, for example by spinning a narrative how you were justified to treat him like shit because he ignored your text message the day earlier, you focus on the past. Your narrative focusses on not making you feel guilty about your past action. This narrative about the past will probably impact your future decisions as well. Maybe the next time you see your friend you will be hostile towards him, because if you are not, your behavior is not consistent with the narrative you just created. This is exactly the same pattern as in the sunk cost fallacy. You make a bad decision regarding the future (being hostile torward your friend) to avoid admitting mistakes in the past (you treating him badly without being justified to do so).

What you could do instead is to mentally separate past and future. So instead of justifying your mistake of being rude to your friend you could focus on learning from the past and make better decisions in the future. To do this you should get your ego out of the picture. Don’t think about the kind of person admitting you treated your friend badly makes you. Think about what person you want to be from today onwards. Looking at the past with the lens of learning for the future it makes guilt and negative emotions much more bearable. This is because this perspective is more scientific and doesn’t get your ego involved as much.

Acting badly in the past doesn’t make you a bad person. You might have acted badly in the past. But this doesn’t define you. When you put it in the mental frame of learning to be a good person in the future this thing might have even helped you recognize how to behave better in the future. For example instead of using your stress level of that day to justify negative behavior, you can use this knowledge to either try not to be as stressed anymore in the future or be extra careful to not treat your friends badly when you are stressed.