{"id":1799,"date":"2008-09-08T09:00:05","date_gmt":"2008-09-08T16:00:05","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=1799"},"modified":"2023-10-04T22:17:54","modified_gmt":"2023-10-05T04:17:54","slug":"sunk-cost-good-money-after-bad","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/sunk-cost-good-money-after-bad\/","title":{"rendered":"The sunk-cost fallacy: Throwing good money after bad"},"content":{"rendered":"

My mother spent three weeks in the hospital<\/a> in August. Her extended stay affected me in lots of little ways I couldn’t anticipate. To escape my daily worries, I went searching for a little solace \u2014 I re-activated my World of Warcraft<\/a> account.<\/p>\n

World of Warcraft is a subscription-based online computer game. As a player, you become immersed in a virtual fantasy world, interacting with thousands of other players from around the globe. It’s great fun. Enjoyed in moderation, World of Warcraft (or any other computer game) can be a fantastic pastime.<\/p>\n

 <\/div>\n

Unfortunately, I’m not so good with enjoying things in moderation. I had quit the game cold turkey several years ago because it was consuming my life. This time, I made an effort to keep my play under control. For the first week, I limited myself to an hour a day. By last week, however, I was playing at least four hours every day, and other areas of my life \u2014 my fitness<\/a>, my mental health, my relationships \u2014 were beginning to suffer.<\/p>\n

“But I can’t quit,” I thought. “I paid $77.94 for a six-month subscription. Plus I’ve already invested 80 hours into the game. I should keep going.” This line of thinking was dumb, and I knew it. The money had already been spent, as had the time. It was gone. Chasing it with additional money and additional time wouldn’t make things better. I was engaging in the sunk-cost fallacy<\/a>.<\/p>\n

The Sunk-Cost Fallacy
\n\"\"<\/a><\/h2>\n

The sunk-cost fallacy describes our tendency to throw good money after bad. Just because you’ve already spent money on something doesn’t mean you should continue<\/i> spending money on it. Sometimes the opposite is true. Psychologically, the more you spend on something, the less you’re willing to let it go. In Why Smart People Make Big Money Mistakes (and How to Correct Them)<\/i><\/b><\/a>, the authors write:<\/p>\n

Once your money is spent, it’s gone. It has no relevance. To the extent you can incorporate that notion into your financial decisions, you’ll be that much better off for trying. If you’re debating the sale of an investment (or a home), for example, remember that your goal is to maximize your wealth and your enjoyment. The goal is not to justify your decision to buy the investment at whatever price you originally paid for it.<\/b> Who cares? What counts, in terms of getting where you want to be tomorrow, is what that investment is worth today.<\/p><\/blockquote>\n

It’s important not<\/i> to consider past costs when making financial decisions, but to make decisions based on future<\/i> costs and benefits.<\/p>\n

Often we succumb to the sunk-cost fallacy because we don’t want to feel wasteful or to admit we made a mistake. All that Stuff I’m trying to get out of my life<\/a> is nothing more than a manifestation of this: I know how much money I’ve spent for the things I own, and so am reluctant to let them go. What I need to realize is that it’s not what these things were worth to me in the past that’s important, but how much they’re worth to me now<\/i>. If I do not value them, and they’re just taking up space, then they’re better off out of the house.<\/p>\n

<\/span>Learning to Walk Away<\/span><\/h2>\n

We all make financial mistakes. When you realize you’ve done something wrong, try not to think about the money (and time and emotion) you’ve already spent. Instead, decide what to do based on the future. From Why Smart People Make Big Money Mistakes<\/i><\/a>:<\/p>\n

Imagine that you’ve got a ten-year-old minivan that needs a new transmission. The sunk cost fallacy tells us that you’re more likely to plunk down the money for the new transmission if you’ve recently sunk hundreds or thousands on repairs into your clunker before that. So ask yourself: If someone gave you that minivan as a gift yesterday, would you spend the money today to get it running? If the answer is “no” \u2014 because that large an investment is not worth it on its merit \u2014 then it’s probably time to think about buying a new car.<\/p>\n

Similarly, it is relevant only to your ego that your Amalgamated Thingamabobs stock, for which you paid $100 a share, is now selling for $25 a share. If you believe that lower price is a bargain, hold on and maybe even buy more shares. But if it is not \u2014 if, given the chance, you would pass on the opportunity to buy the same shares at any price today \u2014 then it is time to sell.<\/p><\/blockquote>\n

When Kris and I were young and stupid, we paid $1200 to join a “consumers club”, through which we could purchase furniture and housewares for reduced prices. Though the sales pitch had been convincing, it quickly became clear that this was a bad<\/i> deal for us. We had to drive half an hour to reach the club, and when we got there, they never really had what we wanted. Yet we remained members for many years, dutifully paying the $75 annual fee. “We’ve already spent so much,” we’d say. “It doesn’t make sense to quit.”<\/p>\n

Eventually we wised up. Just because we’d already spent a ton of money, that didn’t justify continuing to do so.<\/p>\n

Similarly, I’ve come to my senses about World of Warcraft. I’ve decided to say good-bye to Jahdu, my level 42 Orcish hunter. It hurts to think of the $77.94 I paid for a six-month subscription “going to waste” \u2014 not to mention all the time I spent over the past few weeks \u2014 but I know that it’s better not to pine after sunk costs, and will instead look to the future.<\/p>\n

I’ll get better value from my time if I spend it reading and writing about personal finance!<\/p>\n

<\/span>Another Real-Life Example of Sunk-Costs<\/span><\/h2>\n

Last March, I decided to tackle my physical fitness<\/a> by setting some big goals for myself. One of those was to go from couch-potato to marathon runner in about six months. To goad myself into action, I paid about $100 (non-refundable, non-transferable) to sign up for the Portland Marathon<\/a> (which is being run at this very moment<\/i>).<\/p>\n

For a while, this seemed like a brilliant idea. Having paid for the marathon in advance, I was motivated to train so that my money didn’t go to waste. I began to run with a group. I lost weight. I felt great.<\/p>\n

At the end of May, however, I hurt myself. I took some time off. I didn’t worry too much, because there were still four months left before the marathon. But when I tried to return to running, the pain persisted. I went to see a physical therapist. June turned to July turned to August. Eventually I decided that maybe I could walk<\/i> the marathon. I’d paid $100 for it, dammit, and I wasn’t going to let that money go to waste!<\/p>\n

Over the last couple months, however, I’ve come to realize that I’m engaging in the sunk-cost fallacy again. The fact that I’ve already spent $100 for the marathon is meaningless. It’s a sunk cost. It’s not recoverable. What matters is the future<\/i> cost in time and money<\/a>. And, as it turns out, health.<\/p>\n

I could<\/i> have continued to push myself to prepare for the marathon, but the most likely result would have been additional doctor bills and physical therapy visits. I would be spending future<\/i> money attempting to make past<\/i> money “good” again.<\/p>\n

Instead, I’ve changed my focus.<\/p>\n

I’ve begun to prepare for the 2009<\/i> Portland Marathon. I’m running short distances (three miles) a couple times a week. I’m lifting weights to build my leg strength. Meanwhile, I’ve learned a lesson. In the future, I won’t sign up for the marathon until later in the summer, when I’m sure that I’m physically ready to go.<\/p>\n

<\/span>One More…<\/span><\/h2>\n

In late June, I laid out plans for a five-week trip to England (and beyond). I was going to hike Hadrian’s Wall<\/a>, take in an Everton<\/a> football match (or two), visit Bath and Wells, and \u2014 best of all \u2014 spend time with GRS readers all across Great Britain. (And possibly in France and\/or The Netherlands, as well.) On July 4th, I bought a one-way ticket to London, and was looking forward to having a series of small adventures.<\/p>\n

That’s my dream world.<\/p>\n

In the Real World, things didn’t go as planned:<\/p>\n