Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Sunk Cost Fallacy in Your Workout and Wallet
Transcript
- Lucas: Luna, I have a question for you. You buy a ticket to a movie, walk in, and twenty minutes in, you realize it's terrible. Do you stay or leave? Luna: Honestly, I probably stay. I already paid, you know? I tell myself I'm getting my money's worth. Lucas: Right. That's the sunk cost fallacy in action. You've already spent the money — it's gone. But your brain treats that twelve dollars as a reason to waste another ninety minutes of your life. Luna: And I hate it every time. But I do it anyway. Lucas: We all do. And it scales. Companies do it with billion-dollar bets. Governments do it with wars. The sunk cost fallacy is one of the most expensive cognitive biases in the world. Luna: So let's define it clearly. A sunk cost is money or time you've already spent that you can't get back. Lucas: Exactly. The fallacy is when you let that irrecoverable cost influence a future decision. Rational actors should ignore sunk costs. But humans are not rational actors. Luna: I want a concrete example. Give me a famous corporate blunder. Lucas: New Coke. 1985. Coca-Cola had spent four years and millions of dollars developing a sweeter formula to beat Pepsi in blind taste tests. They ran two hundred thousand taste tests — and in every one, people preferred New Coke. So they launched it. Luna: And it was a disaster. People hated it. They demanded the original back. Lucas: But here's the sunk cost angle: early in development, Coke's own testers flagged that even though people preferred the new taste in a sip test, when they took a whole can home, they rated the old Coke higher. The data was there. But the project was already too big to stop. Luna: So they ignored the warning because they'd already spent the money. Lucas: Exactly. They escalated their commitment. CEO Roberto Goizueta later admitted they got so caught up in the science of taste that they forgot the emotional attachment. But the sunk cost was the engine: 'We've come this far, we can't turn back now.' Luna: It's like the gambler who doubles down after a loss. He's not trying to win — he's trying to break even. Lucas: That's the exact psychology. Loss aversion meets sunk cost. Your brain frames the past expense as a loss you need to recover. So you throw good money after bad. Luna: Give me a current, real-world example. Something happening this year. Lucas: Let's look at NATO and military aid to Ukraine. As of May 2026, Western allies have committed over two hundred billion dollars in aid since 2022. That's a massive sunk cost. Luna: And some critics say we should cut losses, negotiate a ceasefire, stop the bleeding. Lucas: Right. But the counterargument is often sunk-cost flavored: 'We've already invested so much, we can't let it be for nothing.' That's not a strategic argument — it's an emotional one. NATO's actual calculus should be about future outcomes, not past spending. Luna: But isn't sunk cost sometimes rational? If you've invested in a relationship for ten years, isn't it worth trying to salvage it? Lucas: Only if the future prospects are good. The ten years are gone. The question is: do you want to spend another ten years unhappy? The fallacy is when you let the past dictate the future independent of the facts. Luna: Okay, how do we fight it? What's the mental trick? Lucas: Kahneman and Tversky — the fathers of behavioral economics — suggest a reframe. Ask yourself: 'If I had not already spent this money or time, would I spend it now?' If the answer is no, walk away. Luna: That's the 'zero-based' thinking. Pretend the past didn't happen. Lucas: Exactly. In investing, it's called ignoring the purchase price. When you look at a stock you bought at one hundred dollars that's now at sixty, the rational question is: 'Would I buy it at sixty today?' If yes, hold. If no, sell. Luna: But it's so hard to do. That sixty-dollar stock feels like a forty-dollar loss. Lucas: That's because your brain tags the purchase price with emotional weight. But the market doesn't care what you paid. The stock only knows what it's worth now. Luna: There's a classic experiment. Kahneman gave students a scenario: you buy tickets to a play, then lose them. Will you buy replacements? Most say no. But if you lose the cash equivalent, most say yes. The money is fungible, but the ticket isn't — because you've already 'invested' in the ticket. Lucas: The ticket in your mind is a sunk cost. The cash is just cash. Same economic loss, different emotional frame. Luna: So how do we train ourselves to spot the fallacy in real time? Lucas: I use a rule of thumb: if you're justifying a decision by referencing something you already did, you're probably in sunk cost territory. The only valid reasons are about the future. Will this make me happier? Will this make money going forward? Luna: That's actually a good litmus test. 'I already paid for it' — stop right there. Lucas: And companies can institutionalize this. Some firms have 'red team' sessions where a new team reviews an ongoing project with no knowledge of prior investment. They ask: 'If we were starting today, would we fund this?' That kills sunk cost bias. Luna: Amazon does something like that with their 'working backwards' method. They start from the customer press release and work back. They don't start with what they've already built. Lucas: Great example. Bezos also talks about 'disagree and commit' — but that's a different bias. For sunk cost, the best tool is the fresh pair of eyes. Luna: You know, this episode is actually a good example of why I love this show. It makes you rethink everyday decisions. And if that resonates with our listeners, there's a way to keep this ad-free and independent. Lucas: Yeah. We don't do sponsors, we don't sell your data. The whole thing runs on listener support. If walking through the economy with us has made something click, you can throw a few dollars in the jar at buy me a coffee dot com slash fexingo. Luna: It's a small gesture that keeps us from ever having to pitch you a mattress or a meal kit. And it feels good to support something you actually value. Lucas: So back to our question: how do you actually escape the sunk cost trap in your own life? One technique I love is to calendar your decisions. Every quarter, review your biggest ongoing commitments — gym membership, streaming services, even a work project — and ask the zero-based question. Luna: I did that last month with my gym membership. I hadn't gone in six months. But I kept paying because I'd signed a contract. I finally canceled. Lucas: And you felt relief, not loss. Luna: I felt lighter. It was stupid that it took me so long. Lucas: It's not stupid. It's human. The sunk cost fallacy is wired into us. The key is catching yourself in the act. Next time you stay in a bad movie or hold a losing stock too long, just ask: if I had a blank slate, would I start this today? Luna: And then walk out of the theater. Or sell the stock. Or cancel the gym. Lucas: And maybe, just maybe, save yourself a few hundred dollars and a lot of regret.