Have you ever found yourself devoting more resources, time or money to a project that was no longer profitable or viable? If yes, then you might have been a victim of the “Sunk Cost Fallacy.” Surprisingly, most of us are guilty of this cognitive bias, which can have dire consequences on our decision-making process, especially in a business or negotiation context. In this blog post, we discuss the Sunk Cost Fallacy, how it affects our business decisions, and how to overcome it.
The Sunk Cost Fallacy is a cognitive bias that occurs when past investments, be it money or time, affect our current decision-making process. In some cases, we continue to invest in projects or deals because we have invested so much in it already. Unfortunately, this can lead to poor decision-making where we ignore vital information that suggests the project is no longer feasible. Furthermore, we end up with wasted resources and time that could have been channeled elsewhere.
The Sunk Cost Fallacy often arises in negotiations whereby parties involved feel compelled to stay committed to a deal or project even when it goes south. For instance, a company that committed to a marketing campaign might continue to fund it despite poor returns because it has already spent a significant amount of money on it. This bias could also result in negotiators backing out of viable deals due to the investments already made in other projects.
Letting go is not easy, especially in business, but it is essential to avoid losing more resources, time, and money invested in a project with no returns. Instead, it would help to assess the viability of the project objectively, even if you have invested much time and resources. Consider other available options, cut losses, and redirect the resources elsewhere. In the long run, this could lead to better outcomes, and you will be free to pursue other viable projects.
Overcoming the Sunk Cost Fallacy involves an objective assessment of the project's viability and further entails setting a threshold of total investment in a project. For instance, you could set a threshold of $10,000 on a project and opt-out when the threshold is exceeded, regardless of the projections. This way, you can avoid emotional investments and instead focus on objective and logical decision-making.
Another way to overcome the sunk cost fallacy is to engage an independent or third-party consultant who can provide objective, unbiased insights on a project's potential ROI. Third-party input can help you avoid anchoring down on past investments and focus on the current and potential value of a project.
The sunk cost fallacy can have dire consequences on our business decisions, often leading to wastage of resources and loss of opportunities. In some instances, it could lead to the abandonment of viable projects or negotiators losing out on profitable deals. Therefore, it's essential to approach decision-making objectively and consider the project's current and future viability, regardless of the past investments. We recommend setting a threshold on total investment, considering other available options, and engaging third-party input to overcome the sunk cost fallacy. By doing so, you will be able to make rational decisions and avoid costly and emotional decision-making.