Sunk costs are a mental trap that we can easily fall into. We can convince ourselves that we somehow have to make up for or recover from some mistake that we’ve made. We must make good on that deal or fix that problem before moving forward. The ultimate irony is that focusing on sunk costs keeps us from moving forward.
James will talk about why sunk costs are such a block for us and how to get to a place where we can move forward and stop getting stuck in mental traps that we can’t change. The economic definition of sunk costs is a cost that is not productive and can’t be recovered. In personal finance, we get emotionally attached to sunk costs and want to repair them. James talks about why moving on is a better option.
Episode Highlights:
[02:07] Sunk costs is an economic term that means a cost that has been incurred that was not productive and cannot be recovered.
[03:13] In personal finance, we don’t identify things as sunk costs, instead we identify them as mistakes. It would actually be helpful to think of mistakes as sunk costs.
[04:12] The reason sunk costs in personal finance is so painful is because we are paying for it long after it has been realized in the form of debt.
[06:10] It’s better to evaluate decisions going forward and find your next right steps.
[06:57] Sunk costs can’t be recovered, so stop trying. We get emotionally attached to sunk costs and convince ourselves that we have to somehow repair them.
[08:29] We need to understand our reality today with less of a focus talking about yesterday. We need to make decisions in the present that will impact our future.
[09:21] The sunk costs fallacy is a cognitive bias where we continue to pursue things that haven’t been working and won’t work. We’ve put so much into these things it’s hard to stop.
[10:39] When we make decisions from the past, we actually recreate the past. We turn our future into a version of those same past mistakes.
[11:53] We get focused on the story we tell ourselves about the past and then we get committed to it.
[14:04] Your past self may have given you a gift that is really valuable. Maybe the season of this gift has come to an end.
[15:53] A different experience and a growing awareness can change your outcome. What has your past self given you whether they are gifts you haven’t used or mistakes? Move towards the direction of what your future self wants and don’t beat yourself up over sunk costs.
[18:22] The best gift you can give your future self is freedom from sunk costs in your past!
