Forget What The Home Cost: The Sunk Cost Fallacy

The mood was dire, a husband shouts to his wife

 “We are selling this home!” She replies: “No way,

We are not throwing away the money we have already invested in it.”

A real estate agent's marketing campaign to sell a home had been running for two months and had not

netted the desired results. He was in favor of scrapping it.

The homeowner (his client) however

resisted, saying: “I will not come down from the current price and we have already invested so much

time into this. If we stop now, it'll all have been for nothing.”

Both are victims of the Sunk Cost Fallacy.

The sunk cost fallacy arises whenever we have invested a lot of time, money, energy or love into

something. Our initial investment becomes a reason to carry on, even if we are dealing with a lost

cause. The more we invest, the greater the sunk cost becomes, and the greater the urge to continue

also becomes.

Investors frequently fall victim to the sunk cost fallacy just as much or perhaps even more so than

others. Often they base their investment decisions on the acquisition price. “I have already lost so

much money, I can't sell it now.” This of course is wholly irrational. The initial acquisition price

should play no role in follow-on decisions whatsoever. The intrinsic value and its future prospects are

what counts. Though rather ironically, the more money an investment loses, the more investors tend to

cling to it.

This irrational behavior stems from the human need for consistency and from the tough

time we have with changing our minds and admitting that we once thought differently (Inability to

Close Doors) itself a logical fallacy and thinking error.

In conclusion, there may be good reasons for homeowners or investors to continue investing in

something, but beware of doing so for the wrong reasons, such as to justify non-recoverable costs.

Truly rational decision making requires one forget about the initial costs incurred, no matter the sum

and keep in mind that only a fair assessment of intrinsic value and future benefits counts.

Laureen Trent , Trent Realty Florida  

Sources: 

Theodor Tonca: :  Writer, businessman,entrepreneur, CEO of Graham Theodor, supporter of the Austrian School of Economics
Hal R. Akres & C. Blumer “The Psychology of Sunk Cost” Organizational Behavior & Human Decision Processes 35, 1985.
Rolf Dobelli “The Art of Thinking Clearly” (New York: HarperCollins, 2012)