Member-only story
The Sunk Cost Fallacy
How to save a fortune by cutting your losses early
John goes to the casino. He’s aware of the dangers but he thinks, what the heck? I’m feeling lucky.
He decides to set himself a gambling limit of $200.
However, John is not aware of how the human mind works and how it can play tricks on you when the stakes are high.
He loses the $200 very quickly as expected but then, he doesn’t stick to the plan. He thinks “I have to keep playing until I recover my losses”
Of course, you know how it ends. He loses his shirt and goes home defeated.
What happened there?
John was a victim of a very expensive bias: the sunk cost fallacy.
We hate losing. Whether it‘s money or time, we have a hard time cutting our losses and quitting early.
We suffer from loss aversion — the pain of losing $1 is more intense than the pleasure of winning $1 although it should be the same if we were rational.
But why?
The sunk cost fallacy is one of those cognitive biases that triggers some irrational behaviors.
According to Kahneman in “Thinking fast and slow“, the reason for loss aversion is adaptive. Organism have evolved to avoid risk rather than…
