In the world of decision-making, there’s a curious phenomenon…academically referred as “Sunk Costs fallacy”. As a matter of fact, it’s a trap that even the savviest of us can fall into, where we continue to invest time, money, and effort into something just because we’ve already invested so much. Sounds familiar? It’s more common the one can think.
Understanding the concept of Sunk Costs
This is maybe the right time to bring this example up, as the cinema-fight of the year Barbie vs. Oppenheimer is roaring.
Imagine you’ve bought a ticket to one of these movies, but after half an hour, you realise it’s not enjoyable at all for you. Maybe you it’s not your type of movie or it’s not what you were expecting and you are getting bored. Do you stay just because you’ve already paid for the ticket? This is a classic example of the time related sunk cost. We often feel compelled to continue something because of the resources we’ve already invested, even if it’s not giving us any value
There are 3 main types of sunk costs:
- Time related (example above)
- Energy related. You put a lot of effort in something despite knowing it might not lead you anywhere
- Cost related. Think about a company investing in a project realising too late it’s not worth keep doing so
Why do we repeatedly fall into such trap?
Reasons are many, but the most compelling is the fact we as humans despise failure. That’s why we study to become a lawyer for 2 or 3 years, but in the end we open a pastry shop; that’s why we don’t sell the stocks that are tanking but rather hope they will go back up; that’s why people divorce after 15-18 years of marriage. The majority of us cannot stand the concept itself of failure.
Cherry on the cake is that we tend to be unrealistically optimistic when it comes to our own odds of facing a setback in the future.
Failure as a stepping stone for innovation
Failure is often seen as a big red stop sign from society. Though, in the world of innovation, failure(s) can actually be the most important stepping stone. When we’re afraid of admitting failure, we might end up throwing more resources into a failing project, hoping it will turn around. If we would stop doing so, rationally leaving all those biases and society pressure behind, we will be free to explore new, potentially successful ideas.
True innovation starts with embracing failure
Real-world examples: Companies caught in the Sunk Cost trap
One easy to grasp and very day-to-day example are Blackberry & Nokia. They once ruled the (smart)phone market. Despite market trends shifting, they clung to a failing line of smartphones due to the massive investment they had made in it. By the time they finally decided to change course, their competitors had already moved way ahead.
Breaking free from the sunk cost shackles
So, how can we overcome this bias?
- First, acknowledge that the past investment is gone – it’s a sunk cost.
- Internalise and accept that is time to move on. Focus on what the future holds and the potential gains
- Always consider the opportunity cost – what else could you achieve with the same resources? In a business example, instead of throwing x millions euro more in a project, maybe you can redirect those money on something else?
- Seek advice from unbiased sources to get a fresh perspective. Sometimes, an external viewpoint can reveal what you’re too emotionally invested to see
Conclusion: Embracing Rationality for Success
The sunk cost bias might seem like a tricky puzzle, but it’s one we can solve. By recognising its influence, both individuals and companies can avoid throwing good resources after bad ones. The future holds more promise than the past investments ever could. By letting go of what’s holding us back, we can stride towards innovation and success.
We will dig deeper in 2 very clear examples of Sunk costs and how they were managed: Concorde & Metaverse by Meta
