Module 5 · Making decisions · Lesson 7 of 10

Traps in what you hold on to

Loss aversion, sunk costs and the pull of the status quo.

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The idea

A second group of mental shortcuts is about holding on. Loss aversion is the tendency to feel a loss more strongly than an equal gain: losing a hundred feels worse than finding a hundred feels good. It makes people cautious in ways that sometimes help and sometimes cost them.

Sunk-cost thinking is continuing something because of what you have already put in — money, years, effort — even when the future no longer looks worth it. The status quo bias is preferring things to stay as they are, simply because they are that way already, even when a change would serve you better.

All three push toward keeping what you have. The useful question is: if I were starting fresh today, knowing what I know, would I choose this? What you have already spent cannot be recovered either way, so only the future should decide.

Why it matters

These traps keep people in jobs, courses, investments and plans long after they stopped making sense. Recognising them helps you keep what is still worth keeping and let go of what is not.

See it happen

Freya is two years into a four-year degree she no longer enjoys and does not need for the career she now wants.

The first read

She has already put two years and a lot of money into it, so leaving now would feel like throwing that away.

With this idea

She asks: if I were choosing today, would I start this degree? The answer is no. She talks to an adviser, transfers her credits to a shorter programme that fits her new direction, and keeps what the two years gave her.

What changed

She decided based on the future rather than on what she had already spent.

Easy to get wrong

• Deciding that every long commitment is a sunk-cost trap. Persistence is often exactly right; the question is whether the future is still worth it.
• Treating caution as always irrational. Avoiding losses can be wise when a loss would be hard to recover from.

Different perspectives

Reasonable people disagree here. None of these is presented as the final word.

Loss aversion is strong and common

Classic studies suggest losses weigh around twice as heavily as gains, which helps explain why people stick with the familiar.

It is smaller and more situational

More recent research argues the effect varies a lot with context and may be much smaller than first reported; people are not always loss-averse.

What this rests on

Studied, still argued over. There is research here, and researchers disagree about how strong or general the effect is.

• Daniel Kahneman & Amos Tversky — Prospect theory (1979) — A model of choice under risk in which losses weigh more heavily than equal gains, and outcomes are judged against a reference point. How large and how universal loss aversion is remains debated; some researchers argue it is smaller or depends on context.
• Hal Arkes & Catherine Blumer — The psychology of sunk cost (1985) — Studies showing people keep investing in something because of what they have already spent, including a field study with theatre season tickets.
• William Samuelson & Richard Zeckhauser — Status quo bias in decision making (1988) — Experiments and field data showing people disproportionately stick with the current option or the default.

Try it: Starting fresh

1. Pick something you are continuing mainly because you already started it.
2. Ask: if I were starting fresh today, knowing what I know, would I choose this?
3. Write what you would keep from it either way.

Reflect

• Where are you staying because of what you have already spent?
• What would you change if staying the same were not the default?

Use it in the coming days

Apply the “starting fresh” question to one commitment this week, and write your answer in your goals or journal.

Where to do it: My Goals

Goals are where sunk costs hide — the question belongs beside each one.