If you’ve ever persisted with a dead-end job or loveless relationship or a university degree you regret starting in the hope it will somehow improve, or ‘chased your losses’ by doubling down, you might want to pay attention.
Maybe you’ve endured reading a novel you hated from the first 3 chapters or stayed through a movie just because you bought tickets – despite the fact you would rather be anywhere else.
Have you ever done something similar with money? Plunged money into a stock, a small business or tried your hand at Foreign Currency trading, something you didn’t understand? Hung onto that car for too long when it’s cost you a fortune already?
All these actions, and anything else where we ‘throw good money after bad’, are examples of a famous economic principle called the ‘sunk-cost fallacy’ which can be applied to life in general. It’s the tendency to continue with an irrational and often risky course of action not based on the likely outcome, but because we don’t want to ‘waste’ what are unrecoverable costs and time – aka the ‘sunk-costs’.
It’s a very human response to the loss to try even harder to win, sometimes to avoid feelings of guilt or inadequacy, or even just fear of ‘looking bad’.
But at worst ego, politics and emotional decision-making can cause people to double or triple their financial losses, causing huge financial and emotional stress for individuals and their families.
In the cold light of day, it’s not rational, but who hasn’t done something like this? More importantly, how do we stop this apparent madness?
Researchers Andrew Hafenbrack, Zoe Kinias, and Sigal Barsade published their work, ‘Debiasing the Mind Through Meditation’, Mindfulness and the Sunk-Cost Bias in the Journal of Psychological Science in 2013.
In the research, the results suggest that increased mindfulness reduces the tendency to allow unrecoverable prior costs to influence current decisions.
“Meditation reduced how much people focused on the past and future, and this psychological shift led to less negative emotion,” Kinias wrote in the journal. “The reduced negative emotion [then] facilitated their ability to let go of sunk costs.” Mindfulness does have some power over bad financial decision making!
In another study, from Elsevier’s journal Personality and Individual Differences in 2007, found “mindfulness is associated with less severe gambling outcomes”.
Chad Lakey, Keith Campbell, Adam Goodie (University of Georgia) and Kirk Warren Brown (Virginia Commonwealth University) concluded their findings. They wrote, “are hopeful in suggesting that the greater attention to and awareness of ongoing internal and external stimuli that characterizes mindfulness may represent an effective means of mitigating the impulsive and addictive responses and intemperate risk-attitudes of individuals with problem gambling.”
They concluded: “In this light, mindfulness may help to lessen the grip of automatic thoughts, affective reactions, and behaviour patterns.”
Research into the specific benefits of mindfulness is ongoing but it seems clear that a regular mindfulness practice can have powerful positive effects on dysfunctional decision-making around money.
13th April 2018