Sunk Cost Fallacy: An Excuse to Improve Your Life
A few months ago I was chatting with a good friend after a surf.
He was looking at my car and asking about how I like it.
I had bought a 2005 Scion Xa a few weeks earlier. It was just a tad different looking then his 2011 Toyota Tundra he had bought a couple years back.
I told him my car got 40 miles to the gallon and he almost shit his pants. Then he told me his car got about 13 miles to the gallon and I almost shit mine. (Ford's 1908 Model T got 20 miles to the gallon!)
As we went on I continued to lightly hint that my Scion could be used for 95% of what he uses his Tundra for. But it just didn't get all the way through.
The conversation finished something like this:
"Yeah, I mean I'd probably make the change now, but I spent so much on this truck that it's not really worth it any more."
RED LIGHT! HUGE RED LIGHT FLASHING EVERYWHERE!
At this point, my stomach dropped. I wanted to scream "Wait!" but I wasn't sure if my next comment would be felt as helpful or snarky. I ended up deciding to let it go.
Lucky you though... Let's use this as a learning experience
The decision to not change from a bad situation because so much time, energy, or money has already been invested in it is known as the Sunk Cost Fallacy.
Ever know a friend who was in a horrible relationship? You knew it, they knew it, but when you spoke about it together she said, "I can't leave. It's been too long. I'm just too far in."
Wake up and dump that scumbag! Sunk Cost Fallacy bomb. BOOM!
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What if you put $20,000 into a new car? The car lost 10% of it's value the day you brought it home. Then three years later it had already lost 45% of its value. Now its only worth $11,000. Over those three years you had to pay $7,000 each year to insure it, fuel it up, and complete its maintenance work.
So after the first three years your car has lost $9,000 in value and cost you $21,000 to keep it up and running. $30,000 -- poof, gone.
One day you meet someone that shows you a car that looks a little different. This car can do 95% of what your car does. You can get from point A to point B just as well.
You can buy this car for $5,000. It then will cost you $2,000 a year to insure it, fuel it up, and complete its maintenance work. And its value will lose a small hundred or so dollars over the next 5 years you plan to have a car.
If you keep your car for five more years it will lose 70% of its starting value. That would be another $5,000 lost in its value! Your car would only be worth $6,000 after the next five years. And during those five years you would have to continue to spend $5,000/yr just to keep it running. So in those next five years that would be another $30,000 spent ($60,000 all together!).
BUT! If you swallow your loss and sell your car for $11,000 right then, you can turn around and use $5,000 of that sell to purchase the other car. That would leave you $6,000 ahead right off the bat. And then because you're only spending $2,000 a year for the next 5 years to keep it up a running, in five years you would save another $20,000.
So if you swallow your loss right then. Five years later you will come out $40,000 ahead! Talk about a powerful investment. It's Sunk Cost Fallacy at work.
Then you can put that $40,000 in a good old index fund with dividends reinvesting and watch it grow to $95,000 in 10 years.
Which do you want? A car draining your wallet or a just as useful car with $95,000 extra sitting in your stash?
So next time you think, "I can't change this shitty situation now, I've put to much time/money/energy into it."
You should think, "That's some Sunk Cost Fallacy bologna. There's still some hidden green for me to pull out of this. So I'm going to make the change and make my situation better ASAP."
Now go out there and do it!
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