You will be able to stop past spending from driving future money decisions.
Darren's investment-linked plan from lesson 7.2 has taken S$6,000 of premiums over two years. When he thinks about stopping it, the first thought that comes is always the same: "Then the S$6,000 is wasted." That thought feels like financial prudence. It's actually the one piece of information that shouldn't affect the decision at all, because the S$6,000 is gone whichever way he decides.
A sunk cost is money, time or effort already spent that you can't get back, whatever you choose next. Critical thinking and better decisions, lesson 2.3, Sunk costs and other traps in your own head, covers the general idea with examples from work projects. This lesson applies it to money decisions, where it's often hardest to see.
The logic is simple to state. A decision is a choice between futures. Money already spent is part of the past in every one of those futures, so it can't make one future better than another. The only things that can are the costs and benefits still to come.
Yet sunk costs pull hard, and loss aversion from lesson 2.2 explains why. Walking away makes the past spending feel like a loss you're admitting to, while carrying on keeps open the hope that it will all have been worth it. People pay more in future costs to avoid writing off a past one.
Insurance policies are a common case in Singapore. People keep paying premiums into a policy they wouldn't buy today, because stopping would "waste" what's already been paid. Here there's an important complication, covered in Insurance Decoded, lesson 7.2, Why replacing a policy usually costs you. Many long-term policies front-load their costs, so the early years are the expensive ones, and surrendering can lose money compared with keeping the policy. That's a reason to keep a policy, but it's a forward-looking reason: it's about the costs and values from here, not about what you've already paid. The sunk cost thinking is the voice that says "I've put in too much to stop". The sound reasoning is the one that says "from here, keeping it costs less than any alternative".
Renovations are another. A couple pays a contractor a S$12,000 deposit on a S$30,000 job. The work is late and poor. In this example, finishing with the same contractor will cost the remaining S$18,000 plus, they estimate, S$4,000 of rework. A new contractor quotes S$20,000 to finish properly. The S$12,000 is gone either way. The real comparison is S$22,000 and a contractor they don't trust against S$20,000 and some hassle, along with whatever they might recover through a claim. Sunk cost thinking makes the first option feel safer because "we've already paid them so much".
Losing investments are the third. Hui Min's stock from lesson 2.1 fell from S$2.40 to S$2.10. Buying more "to bring down my average price" is a common move. But the average price is a sunk-cost number. If the shares are a good buy at S$2.10, buy them for that reason, and if they're not, a lower average won't make them one. Lesson 6.1 showed the related habit of holding losers to get back to even.
The working question is: from here, what are the future costs and benefits of each option? Leave the money already spent out of it entirely.
For Darren's plan, that means a list of facts he needs from his adviser and the policy documents. What will the plan cost from here, in premiums and charges? What cover does it give him, and does he need that cover? What would he receive if he surrendered it today, and what would it cost to replace any cover he still needs? Could he reduce the premium, make it paid-up, or keep only part of it? None of those questions mention the S$6,000.
When he got the figures, the plan's current surrender value was S$2,900 in this example, well below what he'd paid, because of the front-loaded charges. That shortfall stings, but it's also sunk. The decision is between keeping the plan from here, with its future charges and cover, and taking S$2,900 now and buying any cover he needs separately. He's comparing those two futures with his adviser. Whichever he picks, he'll pick it for what happens next.
Sunk cost thinking has a voice, and you can learn to hear it. "I've already put so much into this." "It would be a waste to stop now." "Let me at least get my money back first." "We've come this far." When you hear any of these in your own head about money, it's a cue to write down the future costs and benefits of each option on a page that has no room for the past.
Pick one ongoing cost you keep paying partly because of what you've already spent, and get ready to judge it on the future alone.
Pick one ongoing cost you keep paying because of what you have already spent and decide it on future costs alone.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).