Have you ever regretted a decision – financial or otherwise – but you were “in” so deep that it felt like admitting defeat to get out? Even though staying in made you miserable or continued to lose you money? This is known as the sunk cost fallacy and it stems from the cognitive bias known as loss aversion.
In simple terms, loss aversion suggests we feel losses more powerfully than wins and thus will do anything to avoid defeat. It’s human nature! But it can be costly in your relationships and financial accounts.
Why? Because you can’t dig yourself out of a hole. You have to put the shovel down and start climbing. This can mean selling a bad investment, cancelling an unfulfilling commitment or quitting that side hustle that’s more hustle than cashflow.
The most common example of loss aversion that we see in our practice is with rental properties. Sure, the tenants are terrible and the repairs are expensive, but there’s so much money invested! And what about the tax bill when they’re sold?!
What many people overlook while holding onto a losing asset is the invisible penalty known as opportunity cost. Every resource you keep tied up in something unfruitful is a resource that cannot work for you elsewhere. By choosing to take a calculated loss today, you have the opportunity to redirect those resources to something that may actually yield a positive return –possibly with a lot less headache.
And let’s not forget that not all resources are financial. Time is perhaps the most valuable and nonrenewable resource any of us have, so let’s make sure we use it in a way that is both fulfilling and productive.
If you love being a landlord, we want you to be one! But if you’re only holding on because of sunk costs, we can help walk you through the pros and cons of getting out. And if the hole you’re in isn’t real estate related, the fact remains - the time is already gone and the money is already spent. But what you can gain back is some peace.
Once you’ve cut your losses, you are free to start investing in things that align with your core values and bring you actual joy. If you need someone to help you put down that shovel – let us help!