How many things are you doing in your life simply because you’ve already devoted so much time, energy or money to them so far?
I stayed on the brokerage side of my industry even though the inherent toxicity of the business model had become apparent to me years ago. It was all I knew and I had childishly expected it to get better, to somehow become a more worthwhile endeavor if I’d only just stick it out a bit more. I know guys who still show up at that job every day, despite the fact that its inescapable futility had already occurred to them years ago. Part of it is fear of the unknown, but mainly, this inertia is a Sunk Cost Fallacy phenomenon.
The Sunk Cost Fallacy goes something like this: “Once you’ve irrevocably paid for something you should take that into account when considering what to do next.”
Nonsensical and totally illogical. And yet we do it to ourselves it all the time…
So you’ve paid to go to this gym for three months even though you’re seeing no results – I can’t quit now!
So you bought a stock right at its all time high – How can I sell it here? Look what I paid for it!
So you’re dating someone and it just doesn’t seem like marriage is something they’re interested in pursuing – But I’ve put so much time into this relationship! Don’t I owe it to myself to see how far it can go?
So you’re slaving away at a dead-end job – How can I quit now after so many years? I’ve paid my dues, haven’t I?
So you’ve been keeping your money with a manager whose whole outlook and strategy, despite the eloquence with which he explains his thesis, has been completely wrong – I can’t give up on him now! Not just before he’s about to be proven right!
The Sunk Cost Fallacy keeps you in error, it steals the most precious resources you have at your disposal – opportunity and time.
It’s poisonous, identify it and cut it out sooner rather than later.
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I’m a New York City-based financial advisor at Ritholtz Wealth Management LLC. I help people invest and manage portfolios for them. For disclosure information please see here.
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