If you’ve ever persisted with a disastrous job or relationship or PhD in the hope it will somehow get better, or ‘chased your losses’ by placing risky bets in a game of cards, you might want to pay attention.
Maybe you’ve endured reading a novel you hated from the first 50 pages, or stayed through a concert 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 failing business or investment property? Hung onto a 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 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, families and bosses.
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?
By becoming mindful. But that doesn’t mean by thinking through our decisions more carefully; our choices are often poor when affected by strong emotions.
Research has shown mindfulness meditation can improve poor financial decision-making, at least in terms of the sunk-cost fallacy. Researchers Andrew Hafenbrack, Zoe Kinias, and Sigal Barsade published the results of experiments into the effects of mindfulness on the ‘cognitive trap of sunk-cost bias’ in the Journal of Psychological Science in 2013.
The study participants were split in two groups, one of which went through a 15 minute “breathing meditation” while the other did “mind-wandering” exercises. The first group performed much better on a series of questions about how to react to sunk-costs.
“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.”
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 “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 behavior 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 risky and emotional decision-making around money.