Overcoming the Sunk Cost Fallacy

“All over the place, from the popular culture to the propaganda system, there is constant pressure to make people feel that they are helpless, that the only role they can have is to ratify decisions and to consume.” 
― Noam Chomsky

This year I have thrown away or donated literally hundreds of dollars worth of stuff. Wherever possible I have given away and donated things that I don’t want or don’t use. My little sister has benefited from the regular reorganization of my bathroom shelves and closet. I’ve given unloved items to coworkers and friends, and my preferred charity shops have received several drop offs. But stuff has also ended up in the trash where I couldn’t reasonably or ethically unload it.

I sort of cringe to type that, but it’s the truth and I’m continuing to try and be radically transparent about my money choices. Hi, I’m C. and I have (metaphorically) tossed money in the garbage in 2018.

In thinking about what I’ve gotten rid of in the last year in a bit of depth, I realized how much of being able to reduce my possessions and luxuries to a more reasonable level has come from a breakthrough about a concept that is well established in the economics world and drives a surprising amount of consumerism in my opinion. Let me explain…

The Sunk Cost Fallacy

The Sunk Cost Fallacy is an economic and business concept which can be explained in a lot of very complex and intelligent ways but can be boiled down pretty simply: a sunk cost is money that you have either spent or lost and that there is no way to get back. The fallacy part happens when human biology and psychology kicks in. There is some pretty good scientific reporting out there about how, as a species, we are designed to try and maximize our investment of time, energy, or resources. Unfortunately, there is also good scientific reporting to show that we can also be pretty dumb about calculating our return on this investment. Where we have spent time, energy, or resources on a thing, the more we have put into that thing, the less likely we are of being able to walk away from it, even if the results are bad.

Businesses fall prey to this, and so do people. If you’ve ever stayed in a movie theatre watching a film you hated, if you have ever extended a relationship of any kind even as it turned toxic, if you have ever continued to throw money at an idea or business even as the likelihood of your success shrinks, if you have ever kept eating a meal after you are full simply because you’ve paid for it, you have fallen into the SCF. Obviously these things are not at all on the same scale as one another, but the principle is the same.

Once you awaken to the SCF, I mean really awaken to it and its effects in your life rather than just being aware of it as a concept, you start seeing it everywhere. Learning to realize and accept my own SCF thinking when it comes to my spending has been a process for me over the past couple of years. A small, irrational part of me used to try to justify my bad money choices–which I think is a fairly common experience. If I hold on to this item, I may use it some day. It may fit. I may like it more. It may be useful.

I’m facing up to this because, speaking only for my own case, this has been categorically bullshit.

A makeup or skincare item that breaks you out or you hate the look of on your face is no less expensive or more valuable for sitting on your shelves for months because you refuse to either re-home it or throw it away.

A piece of clothing that you never wear or lingers in the closet (possibly with the tags on) did not cost you less because you are holding on it.

An item that doesn’t function the way you need it to will not function better for taking up space in your drawer, and you probably will not use it more over time.

When you buy something, in almost every single case, the damage has been done. The cost of labor, construction, and transportation has already been incurred. Your wallet has taken the hit. And unless you come to your senses and return the item quickly, you are not getting your money back. This is why certain items have ended up in the donation pile or in the bin this past year. I had done the financial damage, the choice was not the best one, and I had to find an intelligent way forward.

Managing your bad money choices.

So, how have I coped with this uncomfortable tally in the past year? A few ways.

I put myself on certain restrictions, and documented them publicly to keep myself honest. I didn’t quite meet my goals, but by writing and talking about them, I am convinced I mitigated damage. Did I spend money on makeup this year, even though I had a goal not to? Yes. Would I have spent more without my goals? Almost assuredly yes. Did I buy more than 18 personal items this year? Yes. Would I have bought more without the mental check of knowing I was making myself publicly accountable for them? Definitely. All told, I spent less than 4% of our disposable income on personal shopping this year and I feel good about, even though in terms of sheer numbers I know I could have used that money better.

I made a little extra money by reselling some items. Did I recoup all money I spent in the first instance? No, but I did get some cash back by reselling items through trusted consignment dealers and listing them online, and I cleared out space in my closet as a result.

Where I couldn’t sell, I donated plenty of items to shops where 100% of the proceeds go to charity. Does it make up for money spent or environmental production costs? Nope. Did it help make anything even a tiny bit better in the world? I like to think so.

I did (actually) practice some delayed gratification. I would like a much more “finished” and decorated home than we have, but I decided to be okay with our fairly spare furniture and blank walls for a while longer. We bought some art for our home for our anniversary this past year and one of my 2019 projects will be spending money on getting things framed. I bought one piece for the front room and I’d like to buy one or two furniture pieces next year if I’m happy with our financial progress as well, but I’m going to play it by ear.

So, what can I take away from a year of trying to be more honest and intentional about what I buy?

 

The only cure for poor spending choices is the discipline of good ones.

That means making budgets and sticking to it.

That means planning your purchases in advance, with thought and intention, and not giving into impulses. Food, travel, clothes, random shit…it all matters.

That means building a wardrobe slowly, intentionally, and thoughtfully.

That means delayed gratification in saving up for big ticket items for your self, home, or family rather than slapping down a credit card.

None of this is groundbreaking or radical stuff, but it is important to reiterate until it becomes gospel to you.

5 thoughts on “Overcoming the Sunk Cost Fallacy”

  1. Lots of thoughts on this one…most of which comes down to primal stuff like what we need versus what we want or feel we deserve (as compensation for…shitty work, shitty family, loneliness, sadness, etc.)

    Having a very low income this year has meant not buying anything much except for American health insurance (about to go up by 20 % of course, while our incomes do not.) When I do have $$$ to splurge, the home always gets it first — have spent about $2,000 in the past few months on: a new rug, steam cleaning of sofa and chairs, a small hand vacuum, cleaning of four rugs, some new fabric to line a glass-front cabinet and framing a small poster I got free. That’s a lot of $$$ — but I work at home, so a clean, well-lit, attractive home feels essential to me — much more than make-up or clothes.

    But you work in an office and have to be presentable and managerial every day, so that’s different.

    In general, I am very careful about what I buy. I get more pleasure knowing I have $$$$$ in savings than in owning a lot more stuff. I value security more than anything.

    My second largest place to splurge — without hesitation — is travel. I think if you are VERY clear on your priorities, it helps. As someone who owns very little make-up, no serums and very few products, it’s just not a category of consumption that appeals to me.

    1. Everyone’s got the things that matter to them, and the things that they find personal value in that probably falls under another person’s “frivolous” category. I liked your comment about “compensation” because I think that’s an interesting idea to tease out–both how we justify our consumption, but also on the flip side, how people use the same idea to sell us stuff. That part is a lot more sinister when you open your eyes to it, and when you consider how much consumer debt society is swimming in. It’s something that has really fueled our thinking on and commitment towards our financial goals.

      1. I have always valued creative freedom and financial security over anything I could buy otherwise. Both come at a cost — i.e. NOT buying a lot of stuff and experiences I would very much enjoy because I had rto save money and live frugally. But I only have so much $$$$ and life is very expensive in the U.S./NY as someone buying free-market health insurance.

      2. Reading your follow up made me consider again how few “big” items Jeff and I own. If we needed to, we could throw almost everything we own of value into suitcases and just GO. The major casualities would be a couple of pieces of furniture which would cause a pang, but we don’t have a whole household that we’d lose in an emergency or disaster. I think our purchasing history reflects the idea that what we really value at this season in our lives is mobility. Interesting to dissect this!

      3. True!

        I’ve often looked at our home and realized how few major pieces we have — an armoire that I’ve owned from my first marriage in the mid 90s; a vintage chest of drawers also bought then; an 18th c armoire bought at auction about 8 years ago…Our bed is plywood (we made it) with a lovely headboard made with the fabric you and i bought at The Cloth Shop.

        One of my reasons for perpetual ambivalence about ever owning a house — the cost of buying all the additional furnishings! I’d much rather spend the $$$$ traveling than sitting in one place.

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