GM Is Your Business Stuck How To Escape the Sunk Cost Fallacy

Is Your Business Stuck? How To Escape the Sunk Cost Fallacy

Dr., It Hurts When I Do This

When I work with companies on strategy, it’s often very clear to me when something isn’t quite right. With an outsider’s perspective, I’m not wed to the effort, investment, and relationships that may have led to the course of action now in question. It’s easy for me to say, “Stop doing that,” because I don’t have the same emotional attachment to the sunk costs of prior decisions.

There’s a fun Bob Newhart comedy sketch that simplifies a doctor’s prescription when a patient describes something causing pain, exhorting the patient to “Stop it!” See the link below.

The Sunk Cost Fallacy

The sunk cost fallacy is a cognitive bias where individuals continue to invest in a decision or project because of the resources (time, money, effort) they have already put into it despite evidence that the decision is failing or unlikely to succeed. This fallacy is prevalent in business decision-making, where leaders may be hesitant to abandon a failing project due to the investments made in it.

As a general rule, tech and software companies are less likely to succumb to the sunk cost fallacy when dealing with a tech issue for two reasons. First, the agile environment of scrum allows for quick evaluation by the group such that the need for a shift is often evident to the group. Second, the tech world doesn’t call it a failure; they call it a pivot. 

But those same tech companies don’t think about pivoting when evaluating some of the more mundane decisions of business, such as personnel, new buildings, or organizational constructs. 

Translation? All leadership teams are susceptible to the sunk cost fallacy.

How To Avoid the Sunk Cost Fallacy

Here are 5 questions business leaders should ask when considering whether to abandon a project or course of action:

  1. What are the current and projected future costs of continuing this project?
  2. Is there a clear goal or outcome that justifies further investment in this project?
  3. Have we explored alternative strategies or solutions that may be more effective?
  4. What are the potential opportunity costs of continuing with this project instead of reallocating resources elsewhere?
  5. Are there any external factors or market conditions that suggest it may be better to cut our losses and move on?

Moving Forward

When faced with the sunk cost fallacy, it is crucial for business leaders to objectively assess the situation and consider the long-term implications of their decisions rather than being anchored by past investments. By asking these critical questions, leaders can make more informed choices about whether to persist with a failing project or pivot towards a more promising opportunity.

Don’t think of it as quitting or giving up. You’ll never recoup the sunk cost in real terms. Accept that cost as an investment that sets the stage for the decision to move in a new direction.

See the video here Bob Newhart’s “Stop It.”

For a copy of my book, Pitching the Big Top: How to Master the 3-Ring® Circus of Federal Sales, and more information on federal sales, visit Capitol Integration.

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