The “Sunk Cost” Fallacy

Some time ago, in a land far away (Victoria to be exact), I purchased a really sweet vehicle. It was a wheelchair capable people mover, and it was at that time the most well-appointed vehicle I had ever owned. It seemed to be a good price, and being a little short on time and money, I flew down to Melbourne and checked it out myself. No shonky mechanics for me! Turns out I didn’t really know what I was looking at, because the vehicle didn’t make it home. It lost its coolant and I was still 1800km short of home when the engine seized up. Not to worry, I’m a pretty good bush mechanic. Or so I thought …

I asked my brother to rescue me and being the cool bro that he is, he came out with the car trailer and towed my new yard ornament to his farm about 500km away. I got busy and purchased a new head gasket, piston rings and all the extras needed to get the engine going again. Then I got into it and pulled the engine out of the vehicle and stripped it down. I should have stopped there! It was the most complicated machine I had ever worked on, by far. Anyway, to cut a long story short, the rebuild failed and I had to leave the vehicle on the farm and catch the bus home. By this time I was a week late getting back to work and had used up my remaining leave. So I left the vehicle to rust away on the farm and cut my losses, right? … right? … of course not, I wasn’t that smart.

Two months later I hooked up a borrowed car trailer and towed this now very expensive piece of equipment back home, which was a 2200km trip from my brother’s farm. Why? Because I’d spent so much money on the vehicle and thought if I just did a bit more work on it, I could get it going properly again. So I rebuilt the engine a second time, having discovered that the cylinder head was cracked. Got the new cylinder head and all the necessary bits, and thought, “Great! I’ve found the problem and once this is fixed it’ll be good for years”. All went well until I stripped the nut that holds the pulley on the front of the crankshaft. On to eBay and sourced a new crankshaft from Slovenia, which arrived in good order in about a month. Then of course the old crankshaft bearings and connecting rod bearings wouldn’t fit so I had to buy new ones. Wow, I’m going to have a brand new engine by the time I’ve finished this rebuild. Sweet! Might as well put new fuel injectors in it while I have it apart, they’re only $740 for the set.

Finally got my new vehicle on the road over 8 months after I bought it, and headed off on a road trip. Made it about 100km down the road before it boiled off the coolant all over again. Back home and stripped down for the third time, to find that the cylinder block was cracked. Not good. I went to my daughter and asked for a loan to buy a new cylinder block and she called me out on my stupidity. NO, she was not going to enable me to be an idiot. However, she would lend me the money to do what I should have done at the beginning, which is to buy another vehicle. Feeling sick at how much money I had literally just thrown away on this project, I agreed and did as she demanded. One of the conditions was that I get an independent assessment done on the new vehicle before I bought it.

Why did I spend several thousand dollars on trying to save a vehicle that was only worth about $8,000? One possible reason is the “sunk cost” fallacy. This is a cognitive bias where you convince yourself that because you have invested so much into a project, it has to work, and if it doesn’t, you just need to invest a little more and it will work out OK. Looking back now, I shake my head and ask what was I thinking?

This lesson was about buying a lemon of a vehicle, but it is applicable to any endeavour in which we invest money, time or ourselves.I’m not suggesting we give up as soon as we hit any hurdle, but that we really need to have some way to step back from time to time and ask ourselves, “Is this project/vehicle/job/relationship still worth the investment”. You will need to deal with the pain of giving up everything you’ve sunk into it if you walk away, but in the long run your losses could be significantly less if you accept them sooner. It took me several years to pay back all the people I borrowed from to try to keep my project going, and I don’t think my daughter will ever let me live it down!