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Have you ever been to a movie and finished it, even though you knew it was bad after the first half? Or have you finished a book, maintained a career path for too long, or kept an unhealthy relationship alive because the investment you'd already made, whether in time or money, was too bad?
It's probably happened to all of us: The sunk cost bias got us!
We have explained the Sunk Cost Bias or Sunk Cost Fallacy in this post so that you don't fall victim to it anymore. For this purpose, we have listed some sunk cost examples, as well as the definition.
If you have any more questions on the topic, we look forward to an exchange in the comments!
"Don't hold on to a mistake just because you spent a lot of time making it."
The sunk cost bias is a psychological thinkingwhich we like to fall into and act irrationally.
We tend to hold on to something for too long or consider it more valuable just because we have already invested time or money in it. Sunk costs, by the way, are those expenses that are virtually no longer reversible. The costs or expenses are therefore "sunk".
A Sunk Cost example of this?
Imagine a pile of old clothes. They are old clothes of yours that you haven't worn for years.
Please picture this pile of old clothes and put a monetary value on it for this Sunc Cost example: How much would you sell it to me for?
On the other hand, I also come at you with a pile of old clothes. They're used, you don't like them, and they're the exact same clothes as the ones in your pile. How much would you buy them for?
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There are studies on such sunk cost examples that show exactly how irrational we act in such cases. The studies show that in the first case we attach far more value to the clothes than we do in the second case.
Old clothes, books started, damaged relationships, or say a career path we've been following for far too long are just a few Sunk Cost examples to illustrate their importance. But what about sunk costs when it comes to investing?
Here's another Sunk Cost Fallacy example for you:
Investment 1 has a good chance or possible return and has only a very low risk. Do we invest our money here? We currently have no money available because we have already invested it in Investment 2. Do we withdraw it there to use it for investment 1?
Investment 2 also offers an attractive opportunity, but the risk is higher. We have already invested in investment idea 2 in the past. So what do we do?
It would probably be rational to sell investment 2 and put the money into investment 1. However, most of the time we are so "in love" with our investments that we don't have this rational view. The already "sunk costs" distort our reality. This is the sunk cost bias or the sunk cost definition.
Costs sunk in the past (to which one attaches too much importance in the case of the sunk cost bias and thus becomes irrational) are called sunk costs.
You asked us beforehand on this topic about what the differences are between sunk costs vs. Opportunity costs exist. Sunk costs have a temporal basis that takes place in the past. In this case, expenses were incurred in the past and thus triggered certain consequences.
A brief example: You bought 10 shares at CHF 100 each and paid CHF 50 in fees. If you were to sell them again at the same price, the fees would still be incurred. There are therefore sunk costs involved, which is why the sale may be reconsidered.
Opportunity costs, on the other hand, refer to decisions and their future effects as well as their alternatives.
A brief example of opportunity costs: You bought 10 shares at CHF 100 each and now see a more lucrative investment opportunity for the capital invested. So if you don't redeploy your money, you miss out on a return. These are Opportunity costs.
Sunk costs are expenses with consequences that can no longer be reversed or can only be reversed with disadvantages. The sunk cost bias or the sunk cost fallacy is the thought pattern of "mourning" these sunk costs for too long or attaching too much importance to them.
How did you like our post on sunk cost bias? Do you have a topic you'd like us to address in the future?
Feel free to leave us a comment!