One of the biggest bars to making the best financial decisions is our own mental resistance to logic. That’s not a shortcoming, it’s what keeps us from being Vulcans. I even think that a less-optimal financial choice that you actually stick with may be better than the optimal one, if it’s hard for you to do.
But there are times when we need to work to overcome our illogical tendencies in order to make good decisions. I think Plonkee (she also references blunt money in coming to this) has hit upon a great solution for overcoming the sunk cost fallacy.
She provides a defintion of the sunk cost fallacy that I like — “Once you’ve irrevocably paid for something you should take that into account when considering what to do next.” It’s throwing good money after bad.
This leads to people paying for more tennis lessons even though they hate tennis, because they’d hate to see the money wasted. Or people hold onto bad investments because they bought them in the first placce. Or people risk their lives to see a basketball game because they’ve got tickets and the money would be wasted if they stayed home because of the bad weather.
On the outside, we can see the illogic in these actions, but when you’re inside of them it’s hard not to get emotionally involved. So Plonkee suggests picturing what you’ve sunk your money into as a gift, or even a found item.
If you found a pair of shoes which didn’t fit right, would you keep wearing them? If you were given basketball tickets but then there was a snowstorm, would you still go? If someone gave you a stock which was clearly tanking and probably wouldn’t go back up, wouldn’t you sell while you still could?
The money you put into the item is gone (unless you can come up with a way to sell it) and all you’re left with is the item. Use the mental energy that’s trying to get you to hold onto a lemon before you buy. Spend time thinking about whether or not you’ll regret it, whether you’ve done so in the past, whether this is a good deal. But once you’ve bought, let that rest. If you find yourself trying to come up with reasons to use it “even though x” then imagine it as a gift and rethink those reasons.