Beware the Sunk Cost Fallacy

Have you ever nearly injured yourself at a buffet because you wanted to “get your money’s worth?” You paid for a meal, sampled the various dishes, and felt full. But then you thought about the money you’d already spent, and went back for more. And more. And still more, until finally you left the establishment in pain and unable to bend in the middle.

You were the victim of a psychological phenomenon known as “escalation of commitment.” Humans are wildly susceptible to this tendency to continue along the same course of action, even as the negative consequences mount, rather than change course or cut their losses.

When applied to finance and economics, this concept shows up as the sunk-cost fallacy, or “throwing good money after bad.” It is the reason victims of advance fee scams will continue to wire increasing amounts of money to a stranger, in hopes of getting some big payout in return. “I’ve already sent $15,000…what’s another couple thousand at this point, especially if they finally send that $2.5 million?”

Compounding this is the bias many people have toward their own actions. “If I’m already doing this, it must be correct, because…I can’t be wrong, can I?” We all have this bias to some extent—after all, it’s natural to assume your own thoughts are true. The victim’s inner voice may even be telling them something isn’t right, but the bias is too strong to overcome.

Some victims will become angry with anyone who tries to point out their mistake, to the point of cutting ties with well-meaning friends and family members, doubling down on their commitment to what has become an obvious fraud to everyone else. This can happen easily with Romance scams, where the victim (reinforced by the scammer) believes that everyone just wants them to remain alone and unhappy. The thing is, they’re going to end up single anyway, as well as out thousands of dollars, possibly in legal trouble, and more alone than ever.

Simply being aware of the sunk-cost fallacy can help you avoid it. Realizing that you have deep biases toward your own thoughts and actions can be all it takes to step back and reassess a situation when something seems a little weird, or doesn’t quite square with the way the world actually works. Sending a second, third, or twentieth payment to a scammer has never resolved with the victim getting whatever was promised, whether a lottery prize, six-figure entry-level job, or relationship. Therefore if you realize you’ve given something—money or personal information—to someone and you’re starting to have doubts, or people who care about you have expressed concern, listen to those voices. Once you’ve given a scammer a little bit of what they’re after, they will keep trying to get more. Remember the sunk-cost fallacy and cease all contact immediately. Block, report, contact the credit bureaus if you’ve handed over your personal data and call your financial institutions if you handed out account information. It’s hard to admit you were wrong, but no matter how emotionally or financially invested you’ve become, there is time to take control and back out. You’ll feel a lot better once you do.