The Science Behind Why We Can’t Quit Things We Hate
...or how to defeat the Sunk Cost Effect.
My first job out of college was at a slimy financial company.
Not the “Occupy Wall Street” kind of financial company you might assume when prefaced with the word slimy, but an actual “Wolf of Wall Street” type operation.
The main difference being, our office was on the second floor of a nondescript building in Bethesda, MD.
We bought lottery annuities.
By the pep talks we got, you’d think we were curing cancer.
We were ruining lives.
That’s an overly harsh assessment. We tiptoed the line between possibly helpful and most likely destructive.
I was a “Finder.”
My job was to find lottery winners. We used large online public data warehouses to track down lottery winners’ contact information (and the information of everyone we could directly connect them with).
There is no data privacy. There hasn’t been for years.
Then our sales team would hunt these people down using every high-pressure sales tactic imaginable.
These were some of the darkest days of my life.
Pray you don’t win the lottery.
With just a first name and town, it took me less than ten minutes to find someone (and most of their family).
I was the company’s best Finder. I hated it.
I started pretending I couldn’t find people.
I wanted to quit after a month.
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Why We Don’t Quit
We believe our actions are guided by rational decision-making.
In psychology, this is known as normative models of decision-making (how rational people should make decisions) and are described by researcher Robert L. Leahyas:
“Normative models propose that individuals consider all relevant alternatives, collect information regarding the costs and benefits of each alternative, weigh these alternatives irrespective of primacy and recency effects, and focus on enacting a decision regardless of past investments and committed actions. Thus, decision makers examine all the relevant information with the hope of maximizing their search and with the ability to weigh information dispassionately as to its relevance toward a goal. The normative model argues that decision makers should ignore the order of information presented and should give considerable emphasis to “base rate” information in the population at large, rather than choose the first alternative that comes along. The normative model stipulates that decision makers should not place greater emphasis on a personal anecdote rather than on abstract, but objective, data. Normative models are based on Subjective Expected Utility (SEU), such that individuals are assumed to calculate the probabilities of future utilities of various possible actions, compare these utility ratios, calculate the uncertainty involved, and consistently choose the alternative with the best ratio. Thus, the normative model, emphasizing subjective expected utility, describes how a coldly rational person ignores past history of behavior and only focuses on future utility.”
Leahy buries the lede:
“…a coldly rational person ignores past history of behavior and only focuses on future utility.”
Except, this is not how humans make decisions. When quitting something, our default is to make seemingly irrational decisions based on the sunk cost effect.
Sunk Cost Effect
The sunk cost effect is an evolutionary tool developed as a mental workaround for the limitations of our imperfect memory.
We can only remember so much stuff, and in order to survive the last 200,000 years, our brains hacked themselves to make rapid decisions to stay alive.
One such hack is “satisficing,” (choosing available alternatives at an acceptable threshold) rather than optimal strategies.
Instead of overburdening our brains with mundane everyday decisions, we rely on “Past investment predicts future benefits,” also known as the sunk cost effect.
While this mental hack may improve performance on routine tasks, it fails when additional resources (time, effort, money, etc.) do not result in future benefits.
Our inability to identify these situations is why the sunk cost fallacy exists.
How to Quit
Despite hating myself for the work I was doing and barely making enough money to pay my bills (surprisingly, “Finder” was not a well-compensated position), I didn’t quit my job at the Maryland version of “Wolf of Wall Street” for over a year.
Sunk cost effects are a major barrier to change. We don’t simply maintain a course despite being proven a failure; we actively seek reasons to stay.
There are two major reasons for this: Ego and Memory Limitations.
Ego is Your Enemy
When it comes to quitting a situation you know is a failure, ego is most certainly your enemy.
Ryan Holiday, author of the aptly named bestseller Ego is the Enemy, wrote:
“Do you know how you can tell when someone is truly humble? I believe there’s one simple test: because they consistently observe and listen, the humble improve. They don’t assume, ‘I know the way.’”
In a study published in the Psychological Bulletin, researchers Hal R. Arkes and Peter Ayton found that the younger a child was, the less impact sunk cost effects had on their decision-making.
The study asked children of varying ages if they would purchase a new ticket to a merry-go-round after having lost a previously purchased ticket.
The inference is younger children have yet to develop the ego, nor do they adhere to the same social conformities.
This is supported by separate research from West Virginia University suggesting older adults are less likely than younger adults to fall prey to sunk cost effects.
Ego was certainly my enemy in choosing to stay at the lottery annuity company. My ego wouldn’t:
Let my friend down that got me the job.
Look like a loser who couldn’t hack it at a company full of alpha males.
Open myself up to the possibility of making even less money and no longer being able to pay my bills.
Falling prey to an ego-induced sunk cost effect, I stayed longer than I should have and was miserable.
As we discussed in Willpower is Overvalued, we have limited cognitive energy to draw from each day.
Using mental tools such as willpower or, in the case of the sunk cost effect, memory, we drain cognitive performance.
This explains the Concorde Effect, named after the supersonic airplane. The plane’s dim financial prospects were known long before the aircraft was completed. Still, the two governments financing the project (France and Britain) decided to continue anyway because they had already invested a lot of money.
In short, they had “too much invested to quit.”
According to a study published by Northwesten University, as we move farther away from our initial decision and our ability to recall why we decided the first place fades, the magnitude of the Concorde Effect increases significantly.
Over time, I forgot that I had initially taken the job at the “Wolf of Bethesda” finance company because I needed money.
Had I taken the time to remember how shallow my initial decision was, I would have never endured over a year’s worth of negativity.
Rather than claiming past costs as reason enough to abandon a losing strategy, we escalate our justification and investment in the course of action.
This is a big problem.
Sunk cost leads to the opportunity cost of future projects not performed at the expense of continuing a failed project.
There are three ways to combat the sunk cost effect:
Remove ego from the equation. Awareness of ego in the decision-making process is step one. Reading Ego is the Enemy is step two.
Create goal reminders. Regularly review the reasons you made important decisions (both personally and professionally). Journaling helps with this.
Follow your pain. Let it be your guide in future decisions.
The sunk cost effect is real, but it doesn’t have to govern your decisions.
Now get after it.
Yours in insurance,
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