I think we’ve all heard the saying “throwing good money after bad.” This is the concise, down-to-earth description of the sunk cost fallacy, a decision-making concept loved by people interested in economics and psychology alike.
The sunk cost fallacy explains the human tendency to keep investing money, time or other resources into something that is not going to pay off. It’s a way of avoiding regret or that feeling that we’ve wasted our time or money. Even though those initial investments are sunk, and even though investing more isn’t going to improve our lives and may make things worse, we all tend to do this.
A straightforward example is pouring money into an old vehicle that keeps breaking down. Of course, it’s great not to have vehicle payments, and older vehicles can be very reliable. But at some point, that clunker is going to roll from the low-cost sweet spot into the money pit. Pouring more money into it is not going to help recover the previously spent money. Nor is it likely to sell for a price that begins to recoup that money. I think most of us have experienced this to some degree, and once we’ve spotted the trap, most of us can avoid it the next time.
Sunk cost fallacy applies to situations beyond funnelling money into old vehicles. It can even apply to investments of time, money or effort made by other people. A Time article mentions research by Christopher Olivola, an assistant marketing professor at Carnegie Mellon’s Tepper School of Business. Olivola asked participants in one experiment to imagine eating a few bites of a rich cake at a potluck and feeling full. Some were told the cake has come from a local bakery, others that the cake was expensive and sourced from a bakery an hour away. In some cases, the participants brought the hypothetical cake themselves, while others were told another party guest had brought the cake.
Anyone who has attended a potluck knows how this will play out. More participants said they’d feel obliged to finish the expensive cake from a faraway bakery, whether or not they brought it themselves. From my potluck experience, many people feel even more obligated to finish other people’s fancy desserts than anything they brought themselves. In fact, people sometimes feel they should eat multiple (delicious, homemade) desserts partly because of all the effort poured into those baking pans (although some people just love dessert, and that’s okay, too).
These are relatively simple cases, but the decision to cut loose the albatross gets more difficult the more we’ve invested. An often-discussed example is a long-term relationship gone bad, with no hope of substantial improvement. Whether it’s a business relationship, friendship or romance, it’s a lot easier to back out two weeks in than two decades on.
Thinking of a typical farm or ranch, there is no shortage of sunk costs. Here are a few monetary costs that immediately come to mind: inputs for seeding, herd genetics, machinery, fencing materials, livestock handling equipment, corral infrastructure, trucks and stock trailers, costs around buying land, lease fees, water infrastructure, winter feed, minerals and protein supplements, veterinary costs. I’m sure readers can add many more items to that list, but you get the idea.
I think some of the most important investments go beyond dollars. Farming and ranching families also invest in paradigms related to management, production and ways of working and being together. Those investments can span multiple generations. Some of those paradigms have served families for years. Some will hold up well into the future. Others don’t age well, but I imagine it may be hard to let them go if you feel like you’re letting go of the investments made by generations past. I am not going to go into specifics here because I think that what works well on one operation may not work for the neighbours. The question to ask, whenever you’re stuck, is whether the approach you’ve been using for years is still working.
Sometimes discussions around the sunk cost fallacy seem a little bloodless to me, especially when they’re centred on things other than financial investments. Most of us consider more than economics when we’re making big life decisions. It’s important to be financially sustainable, but we wouldn’t have many ranchers — or writers for that matter — if people chose career paths based purely on financial potential. But I think the central concept is sound. While we can try to think through the risks and do some research and analysis, none of us know what the future holds for us, whether it’s in business or life. The whole point of the sunk cost fallacy isn’t to dwell on the unchangeable past, but to look forward. Make choices with the future in mind instead of worrying about what will be left behind.
Another saying I like, which is often applied to doing something slightly risky with a horse such as jumping, is to throw your heart ahead of you. To me, it means we need to take some risks, keep our eyes forward and have faith in our ability to land safely on the other side of the fence.
Seeding the Future
If you’re a visitor to CanadianCattlemen.ca, keep your eyes peeled for a multimedia project we’ll be launching in June, called Seeding the Future. The new project pulled together reporters from several Glacier FarmMedia publications (including Piper Whelan and myself) to create stories on themes ranging from livestock and plant genetics to technology to sustainability. We all had to learn new skills while creating these pieces, so they will include audio and visual components, as well as writing. I found it challenging, but also exciting to do something new. Stay tuned to the Cattlemen website for more.