May 14, 2013
Most of us know what it's like to stay in a job or a relationship after it's stopped being satisfying, or to take on a project that's too big and be reluctant to admit it. CEOs have been known to allocate manpower and money to projects long after it's become clear that they are obviously failing. Think of JP Morgan's "London Whale" Bruno Iksil, who doubled down on a losing bet rather than admit his losses and ultimately cost the bank over six billion dollars. Similarly there was John Edwards, who couldn't bring himself to end his losing bid for the Presidency even after his mistress became pregnant.
The costs to a person who does not know when to quit can be enormous. In economics it's known as sunk cost fallacy, though the costs are more than financial. While we recognize the fallacy almost immediately in others, it's harder to see in ourselves. Why?
There are several powerful, largely unconscious psychological forces at work. We may throw good money after bad or waste time in a dead-end relationship because we haven't come up with an alternative; or because we don't want to admit to our friends and family, or to ourselves, that we were wrong. But the most likely culprit is this innate, overwhelming aversion to sunk costs.
Read more at The Atlantic.
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May 14, 2013