Sunk Cost Syndrome: When the Past Threatens Smart Decision-Making

Have you ever found yourself in a situation where the premium for an insurance policy increased by a significant amount? I did this year when our long-term-care insurance policy premiums were set to increase more than 30% over three years. Even for an experienced planner like me, it was quite a shock to get the notice in the mail.

My initial reaction was anger toward the insurance company for having the audacity to raise premiums. A more rational me then thought how I would just cancel the policies. An even more rational me said, “Whoa, we have paid for these policies for at least five years, and canceling them would mean all that money was wasted.” I became afflicted with sunk cost syndrome—a focus on the payments I had “wasted” that made it difficult to take constructive action.

I should have known a syndrome was what I had. It’s true that I resisted canceling the policies because we had paid the premiums for so long. Wouldn’t it be a waste to throw all that money away? After much analysis and consultation with an outside and independent specialist, I grudgingly realized the prudent course of action was to modify the parameters of the current policies. By doing so, I would mitigate the cost increase while refraining from overreacting by throwing the policies overboard. 

I believe this decision was the correct one, but it amazed me how long it took to convince myself to make the changes and accept that the original policy was no longer appropriate. All I could think about was how we had wasted our money paying for those policies for five years.

I’m sure most of you have experienced this syndrome. Usually, it happens with products or services like insurance, where we pay a fee today for something that may protect us against damage in the future. Another area we experience this syndrome in is warranties. The funny thing is, we don’t want something bad to happen, like needing to use a warranty or collect on an insurance policy, but we get frustrated that we are paying for a product or service that we aren’t using. It’s a love-hate relationship, to be sure.

I found it surprisingly easy to fall victim to sunk cost syndrome. As financial planners, we tell our clients to consider only the things that they can control and to let go of the things that they cannot. An example is market returns on a portfolio—no one can control what returns the markets deliver, but you can and should control the cost of implementing your portfolio and, to a lesser degree, the amount of risk you take. But even as a financial planner, when I read the premium increase notice, I focused on the past premiums paid, not the future premiums I was being asked to pay. I neglected to consider viable options to change the policies and adjust the premiums to meet my needs.

It took an outside and objective professional to snap me out of this syndrome. It’s alarming that I was unable to realize the situation I was in, even though I have counseled many clients in similar situations. However, I am grateful that I was able to get past my feelings and make a sound decision. And so can you.

When you find yourself in a similar situation, I hope you will seek guidance and counsel from an objective professional. Doing so can go a long way toward preventing you from making decisions based on emotions and not facts.