Picture this: It’s game night, and you’re playing a high-stakes game of dice with your friends. You’ve already lost a few rounds, and you’re in deep. Your instincts tell you to quit, but you keep playing, hoping to win it all back. It’s a classic example of the sunk cost fallacy in action. But did you know that this age-old psychological trap is also present in the ancient Indian epic, Mahabharata? Let’s dive into the story and uncover the wisdom it has to offer for better decision-making in business, management, and life.
The Mahabharata: Timeless Business Lessons from a High-Stakes Dice Game
In the ancient Indian epic Mahabharata, we find the tale of a high-stakes dice game that went horribly wrong. The Kauravas, led by the cunning Duryodhana, invited Yudhishthira, the eldest Pandava, to a game of dice. Little did Yudhishthira know that the Kauravas had a trick up their sleeves, with Shakuni’s loaded dice ensuring their victory.
The game began innocently enough, with Yudhishthira placing small bets and losing them. But as the game progressed, the stakes escalated. Unable to walk away, Yudhishthira found himself deeper and deeper in debt. He gambled away his cows, sheep, ornaments, clothes, servants, citizens, kingdom, and even his brothers. At last, he wagered himself and lost as well.
But the worst was yet to come. With nothing left to lose, Yudhishthira wagered his wife, Draupadi, and lost her too. This disastrous game set the stage for a series of events that would eventually lead to the great battle of Kurukshetra.
When calamities are imminent, the judgement is first destroyed.
Vyasa, Mahabharata by C. Rajagopalachari
Through this captivating tale in Mahabharata, we are introduced to a crucial lesson that affects our decision-making in business, management, and life: the tendency to make choices based on what we have already invested, rather than considering the potential future consequences – sunk cost fallacy.
Understanding the Sunk Cost Fallacy: The Psychology Behind Poor Decision Making
🧠 The sunk cost fallacy is a cognitive bias that has a powerful grip on our decision-making. It’s the idea that we’re more likely to continue investing time, money, or resources into something because we’ve already committed to it, even if it’s no longer in our best interest to do so. This fallacy is a result of our deep-rooted aversion to loss and our emotional attachment to our investments, both tangible and intangible.
Simply put, the sunk cost fallacy is like continuing to fix an expensive boat with a leak that keeps sinking, even though the best thing for you to do would be to start swimming.
When making decisions, one should not only consider the sunk costs but also consider the opportunity costs – the potential benefits of alternative actions that could be taken instead.
The Science of Sunk Costs: Why We Make Such Choices and Its Impact on Businesses
The sunk cost fallacy has long fascinated researchers, and they have conducted various studies to understand the psychological mechanisms behind it. In a classic study by Arkes and Blumer, participants were more likely to attend a concert they had already paid for, even if they no longer wanted to go, simply because they didn’t want to “waste” the money they’d spent on the ticket1Arkes, H. R., & Blumer, C. ((1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124–140. https://doi.org/10.1016/0749-5978(85)90049-4.
They would rather sit through a boring concert than spend the same time doing something they love.
Similarly, in a study, participants who were given the responsibility of managing a failing investment were more likely to allocate additional resources to it if they believed they were responsible for the initial investment2Barry M. Staw: Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action, Organizational Behavior and Human Performance. Academic Press. Available at: https://www.sciencedirect.com/science/article/abs/pii/0030507376900052 (Accessed: April 7, 2023)..
These studies demonstrate that fear of loss drives sunk cost fallacy. The impact of the sunk cost fallacy on businesses can be significant, leading to poor decision-making and a reluctance to abandon failing projects or investments.
Sunk costs—anchoring decisions to past efforts that can’t be refunded—are the devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.
Morgan Housel, The Psychology of Money
Drop the baggage from the past – loss, guilt, sunk cost, regret, expectations not met – and stop looking at the door that closed behind. Instead, shrug yourself and step through the door in front.
Real-Life Examples of Sunk Cost Fallacy in Business and Life
The sunk cost fallacy can trap us, affecting many areas of life. In this section, we’ll explore five examples of how it influences decision-making. By understanding these, we can avoid sunk cost fallacy in our lives and businesses.
💍 Relationship: Continuing a toxic relationship even when it’s clear that it’s not working out, just because of the time and effort invested in it.
💸 Investing: Refusing to sell a stock that has been steadily decreasing in value, because you’ve already invested a large amount of money into it.
💼 Business: Investing in a failing project or product, just because you’ve already sunk a lot of money into it, instead of cutting your losses and focusing on new opportunities.
🧑🏽💻 Career: Staying in a job that’s making you miserable, because you’ve already invested so much time and effort in your career path.
🏋🏽♂️ Personal: Continuing to attend a gym you never use, just because you’ve already paid for the membership.
Going back to Mahabharata, in Yudhishthira’s situation, he was driven by the desire to win back what he had lost. Unfortunately, this fixation on his sunk costs caused him to lose sight of the broader consequences of his actions. Ultimately leading to the downfall of his kingdom and family because of the Kurukshetra war.
Overcoming the Sunk Cost Fallacy: Tips for Clearer Decision-Making in Business and Life
Now that we’ve identified the problem, how can we overcome the sunk cost fallacy (a list of other fallacies) in our own lives and businesses? Here are a few tips to help you make better decisions and avoid falling into this psychological trap:
🥸 Recognize the fallacy: The first step to overcoming the sunk cost fallacy is acknowledging its existence. By understanding the concept and how it can influence your decisions, you’ll be better equipped to notice when it’s happening to you.
🧘🏽♂️ Separate emotions from decisions: Emotions play a significant role in the sunk cost fallacy. Try to approach decision-making objectively, focusing on the potential outcomes rather than what you’ve already invested. Learn how to be stoic and make better decisions.
🧐 Reevaluate your goals: Ask yourself if continuing with a particular investment or project aligns with your current goals. Sometimes, letting go of past commitments can open the door to new and more rewarding opportunities.
🫱🏻🫲🏽 Seek external perspectives: Discuss your situation with trusted friends, colleagues, or mentors. They can provide valuable insights and help you see the bigger picture. They provide a different perspective, free from the emotional attachment you may have to your sunk costs.
🫡 Embrace the power of quitting: Sometimes, quitting is the smartest choice. Remember that knowing when to quit and move on can save you from further losses. It also frees up resources for better opportunities.
🔍 Learn from past experiences: Analyze situations where you’ve fallen victim to the sunk cost fallacy. Identify the factors that contributed to your decisions. Apply these lessons to future decision-making to avoid repeating the same mistakes. Use second-order thinking to evaluate the consequences.
💡 To help combat the sunk cost fallacy, ask yourself the following questions:
- Would I invest in this if I hadn’t already?
- Am I just trying to justify my past actions?
- What are the future costs and benefits of continuing with this investment?
A Timeless Reminder: Learn from the Mahabharata and Make Better Decisions in Business and Life
The story of Yudhishthira in the Mahabharata serves as a timeless reminder of the perils of the sunk cost fallacy. In the end, it’s crucial to remember that our decisions should be based on future prospects rather than past investments. As the Mahabharata demonstrates, the ability to recognize and overcome the sunk cost fallacy can be the difference between success and failure.
The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.
Daniel Kahneman
Don’t let the sunk cost fallacy trap you in a never-ending cycle of loss. Recognize it, learn from it, and use the wisdom of the Mahabharata to guide you towards better decision-making in business and life.
Footnotes:
- 1Arkes, H. R., & Blumer, C. ((1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124–140. https://doi.org/10.1016/0749-5978(85)90049-4
- 2Barry M. Staw: Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action, Organizational Behavior and Human Performance. Academic Press. Available at: https://www.sciencedirect.com/science/article/abs/pii/0030507376900052 (Accessed: April 7, 2023).
