Why We Throw Good Money After Bad

You buy a $150 ticket to see a concert in three months.

The day of the show arrives, your exausted from, the friends you were going with cancled and, its pouring rain and it’s an outdoor concert.

You know that staying home on the couch is exactly what you want to do.

But You force yourself to put on a jacket, pay $30 for parking, and stand in the rain for three hours, cold and by yourself.

You convince yourself that if you stay home, you are “wasting” the $150 you spent on the ticket.

For a lot of people, admitting a financial mistake feels worse than actually losing the money. We will happily make ourselves miserable just to prove that our original decision wasn’t a waste.

The Sunk Cost Fallacy

For most people, our inability to simply admit defeat and cut our losses has very little to do with being “responsible”. We do it because human brains naturally hate the feeling of regret and loss.

This psychological blind spot is called the Sunk Cost Fallacy, a concept perfectly illustrated in a foundational study published in Organizational Behavior and Human Decision Processes by researchers Hal Arkes and Catherine Blumer.

The researchers conducted a simple experiment using a hypothetical ski trip.

They asked people to imagine they had purchased a $100 ticket for a weekend ski trip to Michigan.

Shortly after, they find a much better ski trip to Wisconsin on sale for only $50, and they buy a ticket to that one too.

Then, they realize both trips are on the exact same weekend, and the tickets are non-refundable. They have to choose one.

Logically, you should choose the $50 trip to Wisconsin. It’s the better trip, and the money for both is already gone anyway.

But over half the people in the study chose the $100 trip to Michigan.

If you look at it logically, you know the $50 trip will be more fun. But if you look at the price tag, you suddenly think, I can’t just let a hundred-dollar ticket go to waste.

The simple act of having paid more money for something artificially inflates its value in our minds.

But guess what, a dollar spent is a dollar gone regardless of how you feel about it.

If that can happen with a hypothetical ski trip, think of how you view a used car that keeps breaking down, or a stock you bought that is tanking.

The Math Behind Sunk Cost Fallacy

Once you mentally anchor yourself to the money you already spent, the Sunk Cost Fallacy tricks you into throwing good money after bad. You become blind to the fact that continuing to fund a money-losing decsion is bascially throwing your money down the drain.

To see how this quietly makes you poorer, consider the math of the broken-down car.

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