Think about when you spent a few dollars to go to the movies on an opening weekend. The hype has been all over the place and you’ve just got to know what all the fuss is about. You stand in line with kids, old timers, and the occasional annoying human.
You get to the counter, buy your ticket, and jump in another line for drinks and popcorn. By the time you sit down to watch the movie, you’re more than ready to be entertained. Within the first twenty minutes you realize the movie sucks.
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What do you do next? Cut your losses and leave the theater?
What usually happens is you watch two hours of drivel. Then you go home and complain about how you wasted your time and money when you could’ve been doing something useful.
You’re not alone.
Those expensive shoes you never where but can’t get rid of? Sunk cost fallacy.
Those books taking up space because you’ve not gotten around to reading them1 I say this tongue in cheek. I’m guiltier of this than anyone. Even though I read dozens of books a year, I can never seem to get around to all of them. Amazon loves me. ? Sunk cost fallacy.
Those relationships that’re going nowhere fast? Sunk cost fallacy.
The question is why do we fall victim to the sunk cost fallacy in our personal, professional, and business lives and is there anything we can do to cut loose and achieve more?
In economics, a sunk cost is an expense that has already been made and cannot be recovered. A new factory is a sunk cost. Upgrading all the servers in a company is a sunk cost.
Sunk costs are part of everyday life. Not everything pans out.
The sunk cost fallacy, also known as concord fallacy in game theory 2 it’s called the concord fallacy because the British and French governments continued to fund the development of the Concord jet even after it was proven to no longer be economically viable , is our tendency to focus on past investments or costs when making current decisions. The more you invest in something, the harder it becomes to abandon it. It’s one of our learned biasesour learned biases.
The sunk cost fallacy is tied to loss aversion. No one wants to lose, especially when it comes to investment decisions.
In a 1999 paper, Arkes & Ayton outlined tests they performed with young children and lower mammals. The test subjects didn’t exhibit sunk cost behavior. Children would give up the activity that didn’t yield fruits and rats would look for more rewarding behavior.
Looking at the data, we can draw two conclusions:
If it wasn’t learned then our children would also be affected. Just like with every learned behavior, it can be unlearned.
Sunk cost fallacy is tied to our social conditioning. Humans abhor waste. How many times were you told not to waste food, electricity, money, or anything else? You have to make the best use of your resources.
To give up on an investment is equal to throwing away the time, money, and energy you put into it. AKA you’re wasteful. After waste is the commitment theory. Our reputations are important. You can bounce back from a loss; you may not be able to bounce back from a tarnished reputation. The majority of the world honors their commitments no matter the cost 3 this can, of course, be taken too far. If it’s too hairy, get the fuck out of there. Enough said. .
There’s a lot at play when you talk about the sunk cost fallacy. You have to overcome social conditioning to combat it. Combat it you must. The problem is striking a balance between giving up too early and staying in too long.
The sunk cost fallacy is alive and well. Entrepreneurs suffer from it all the time. Part of the reason is because we’ve invested so much of our personal time, energy, and resources into projects. It’s hard to let them go.
How would you feel if you sunk your entire life savings into a product no one wanted? Would you just give it up? Probably not. What’s more likely is that you’d do everything in your power to take it forward.
A company that almost fell victim to the sunk cost fallacy is ConvertKit. Today, they have over 12,000 customers and over half a million in monthly recurring revenue. In 2014 they were making less than two thousand dollars and losing money.
The founder, Nathan Barry, had invested a lot of money in the company up to that point. He had two options. Either give it up and focus on other things or focus on it full time. He decided to focus full time and it paid off.
They’re now one of the most popular email marketing solutions for bloggers.
Instagram started off as Burbn. It was an app that allowed users to check in, post plans, and share photos. It failed. The founder realized the most popular feature was photo sharing.
Instead of trying to make everything work as is, he ditched the other features and focused what his users loved. A year and a half later Instagram was acquired by Facebook for a billion dollars.
In both cases, they knew it was time to pivot. Most people and organizations don’t.
Here are three ways to make better decisions and turn the sunk cost fallacy into a thing of the past.
Fifteen minutes of mindful meditation can work wonders for your business decisions. Meditation extends beyond business. It also improves the quality of your personal life.
There are a series of questions you can ask yourself to clarify the real reasons behind your choices. With the insights you gain, you’ll be able to make better decisions moving forward.
We’re social creatures. From the beginning of written history, we’ve organized ourselves into groups. First it was clans. We then extended into tribes. After that we made city states. Currently, we have nations.
In all social groupings, it’s important to prove yourself in front of your peers. You get to influence and lead the will of the many. The more mistakes you make, the less you’re regarded.
Are you continuing down the wrong path because you don’t want to lose face in front of your peers? We’ve all been there. Sometimes, it takes a deep look inside to come to terms with it. That’s why you don’t see many articles about how people failed.
It’s hard to swallow the fact that you don’t measure up.
My advice is simple. Forget about what people think in the short term. If you give up an idea today and become more successful tomorrow, your past transgressions will be forgotten. The halo effect will envelop you.
You and I have a tendency to feel attachment to the choices we make. We want to be congruent with ourselves. This is doubly true if it has worked in the past. This thinking rarely pans out. The law of diminishing returns is real.
It’s important to always evaluate products, services, and projects in the present tense and future tense. The past is over. We live in the present. We make decisions that affect the future.
If what you’re doing has outlived its usefulness, there’s no shame in dropping it by the wayside and moving on. It’s the height of wisdom. Wise people are few and far between.
Be one of them.
Always ask yourself, “is it worth continuing?” If you have any doubts in your mind then it may be the clearest sign that you need to move on. Weigh all your options on equal footing. Don’t take past failures or successes into consideration.
It’s like a coin toss. Just because it’s been heads three times in a row doesn’t change the probability of it being heads on the next throw. It’s always fifty percent.
The sunk cost fallacy is real. You can get mired down because you want to see everything pan out. Don’t fall into that trap. Constantly evaluate whether or not what you’re doing is worth it.
At the same time, don’t use the sunk cost fallacy as an excuse to jump from one idea to the other. The most successful businesses in the world have stuck to their guns through good times and bad.
It’s up to you to evaluate your situation and decide if it’s better to go on or change directions.
Let me know how you’re winning the fight against sunk cost fallacy in the comments.