Many people fall victim to the sunk cost fallacy.
After all, it’s tough to completely abandon something you’ve put a lot of time (and money) into.
But when it comes to sports betting, by falling for the sunk cost fallacy, you risk losing a lot more by trying to recoup previous losses.
Read on to learn how to avoid the sunk cost fallacy,
What Is The Sunk Cost Fallacy?
Let’s start with an overview.
The term “sunk cost” is an expense that cannot be recovered;
Like a ship that’s sunken to the bottom of the ocean.
Once it’s gone down, it cannot be revived.
Another example, once you pay $50 to fill up your gas tank, that’s it – you cannot give your gas back in exchange for cash.
The sunk cost fallacy goes by several other names, such as the Concorde Fallacy, or the Investment Trap.
They’re all the same thing.
According to the American Psychological Association, different cultures experience the sunk cost fallacy differently.
However, there are just two main causes:
- The Prospect Theory
- The Self-Justification Theory
Let’s explain these psychological factors in more detail.
The Prospect Theory
This explains how people make decisions based on future potential as opposed to final outcome.
When the original theory was introduced, it was suggested that because people valued the potential of large gains higher, they are more likely to take risks.
Other studies have shown that people are more likely to take more risks when faced with potential losses.
In other words, when people lose money, they’re more willing to take greater risk to recoup their losses – a feeling all too familiar in the sports betting industry.
On the other hand, they’re more cautious when they’ve made money because they don’t want to lose it.
The Self-Justification Theory
The self-justification theory suggests that people don’t like to admit when they’re wrong or that they have made a mistake.
So, when this applies to a sunk cost situation, people will continue making a bad investment just to prove a point.
Different reasoning, but same result.
The sunk cost fallacy all comes down to the fear of waste.
Time and money are valuable, so it’s hard to look the other way once you’ve invested a lot.
How Does The Sunk Cost Fallacy Affect Sports Betting?
Let’s say every bet you make was on the favorite.
You never even look at prices on the underdog.
A few weeks down the line, you notice that while you have a winning record, you’re losing money.
What do you do?
Now, some will think that they’re doing something wrong and start considering betting on underdogs.
Other, though, will say to themselves, “Well, I’ve stuck with favorites for this long, I may as well keep going,” even though they may keep losing money, or worse – their entire bankroll.
The sunk cost fallacy gets worse as you scale too.
It’s harder to stomach betting $10,000 on a team that’s not considered likely to win, than spending a few bucks on the roulette wheel during a night at the casino with your friends.
You don’t want to just “throw money away” after all that time you’ve put in to make it this far.
But the more you focus on past trades and investments, the more clouded your judgement.
People don’t always make rational decisions, which is why suck cost bias should never be underestimated.
Am I Falling For The Sunk Cost Fallacy?
Now, sunk cost bias is not always a bad thing.
It can make sense to go back and recommit to a previous strategy.
That said, you must be able to spot the difference between suffering some setbacks and utter disaster.
Have you given that strategy enough time and put enough resources into it to make it a success?
If the answer to this questions is “yes” but it’s still losing, it’s time to try something different.
How To Avoid The Sunk Cost Fallacy
There are five ways you can avoid falling for the sunk cost fallacy:
- Track investments
- Weigh variables correctly
- Don’t go in blind
- Avoid personal attachments
- Look ahead
Let’s break each one down into further detail.
When making a sports betting decision, most people only think of the tangibles, such as the cost of making that play.
It’s also important to make a note of the opportunity costs.
When you stick to a strategy, you’re preventing yourself from using other resources.
Keep track of every play.
Write down what the play is and how much it cost.
You don’t need anything fancy.
A pen and notebook will do just fine, or spreadsheet software like Excel and Google Sheets.
Once you’ve got a good sample, you can objectively see the direction you’re heading.
The results may serve as an important wake-up call.
Weigh Variables Correctly
Sports betting strategies can include a lot of different variables, each with different weight depending on how important it is to the overall success.
The key is to make sure they are just as important as you think they are.
Take baseball for example.
Now, everyone knows the importance of the starting pitcher.
But what about the umpires?
Are they really going to impact on the game as much as you think?
In some instances, sure, but in every game?
Maybe, maybe not.
But that’s why weight is important.
If you place too much importance in the wrong areas, it’s easy to get lost.
So, make sure you have everything set up correctly.
Double-, or even triple-check if you have to.
Create a system of checks if it helps to prevent the sunk cost fallacy entering your systems.
Don’t Go In Blind
Sticking with a so-so strategy because it’s inconceivable…
Because it cannot…
Because there’s no way on Earth it can go wrong…
Is not going to go well for you.
Plan ahead in case you have to cut your losses and move on.
In the words of Ed Seykota:
Cutting losses is not a defeat.
It’s a means to redirect your efforts somewhere else to make you more money.
In 1996, Emmy Award-winner David Breashears was hiking Mount Everest, but decided to go back down the mountain as a blizzard was coming.
Upon their descent, they passed another group that continued upwards.
This was the same group that fell victim to the 1996 Mount Everest disaster.
While this isn’t within the field of sports investing, the point is still just as valid.
Society tells us that showing grit and determination should be applauded.
This is true.
But there’s a limit.
Being “brave” in the face of a clear and obvious obstacle only leads to disaster.
Don’t let pride, ego, emotions, or anything else of that sort cloud your judgement.
Which leads to the next point.
Avoid Personal Attachments
In Buddhism, the Second Noble Truth seeks to determine the cause of pain and suffering.
At the heart of pain is desire, greed and attachment.
Of course, not everyone reading this will follow Buddhist preaching.
But even so, this practice certainly links back to the self-justification theory.
In an attempt to avoid change, we stick to our original way of thinking, even though we know it’s more than likely going to fail.
Getting emotionally involved with something prevents you from rational behavior.
It’s much harder to admit that it won’t work.
And the sunk cost fallacy is always ready to strike when we’re feeling down.
We’re more likely to fight on in the face of adversity when we want to prove a point, or if success depends entirely on this one thing.
No one wants to fail and feel like they’ve wasted time, energy and money.
So, it’s easy to carry on and make it work, right?
Let it go.
Free yourself of the fear of failure.
Free yourself of the fear of wastefulness.
Things change and don’t always go to plan.
The sunk cost bias always has you looking over your shoulder.
You spend time looking at what you’ve already done and what you’ve overcome to get there.
What’s the common theme here?
Past trades, past risks and past choices.
These don’t work well with money-making decisions.
Such decisions look forward.
To the future.
Can you achieve the same goals you set months/even years ago?
Be honest with yourself.
Are bigger profits and greater success out there without that strategy in your plans?
If so, just let it go.
Look at it this way.
When you cut yourself, you cover it up right?
To stop the bleeding.
Pumping more money into a strategy you know won’t work is like shoving a knife into the wound and making it worse.
Don’t do it.
Humans have a strong, natural aversion to loss.
Keep that in mind the next time you’re unsure about making that next big bet.
The losses hurt more compared to the pleasure of success.
The subsequent pain can make you do something crazy.
Let go of the fear of waste and attachments to losing strategies.
This is just one of the reasons why we are able to make 120% ROI a year.
Make room in your life for a better, more lucrative opportunity.