behaviour
Ignore the sunk cost
The rule
Money already lost in a bad product should not decide if you keep paying into it. Judge from today, not from what you have already put in.
Where it flips
Exit charges and tax on leaving are real future costs. Sometimes holding a little longer to cross a lock-in is right. Sunk cost is the past money. Exit costs are future money, and those do count.
Kahneman showed how the pain of admitting a loss keeps people pouring good money after bad. This is the sunk-cost trap. It is exactly what keeps a family paying into a weak ULIP for years. 'We have already put in so much, we cannot stop now.' But the right question looks forward. From today, is staying better than getting out and moving the money? What you have already lost is gone either way. It should carry no weight in the choice.
A worked example
A policy has taken ₹3,00,000 over six years and will return about 5%. That past ₹3,00,000 is gone. The only question is: will the next rupee do better inside the policy, or in a term-plan-plus-index-fund plan? [illustrative]
How to spot it
- ·the choice made on future value only
- ·'we have already paid so much' seen as a trap
- ·leaving now compared with staying, judged from today
Daniel Kahneman · Thinking, Fast and Slow