Josie Ludwig – Managing Director

 

 

If you’ve ever gone to the movies because you have already bought tickets, even though you are sick and may even get worse as a result. If you stay in an unhealthy relationship, simply because you have spent many years devoted to it, or if you have ordered a meal and feel full half way through, but eat it anyway, you have let the Sunk Cost Fallacy influence your decision making. When you can’t let go of something because you have already invested in it, whether it is time, money or another resource, it is time to consider rethinking your approach, as the future cost may be far more than you realise.

What does this mean for your business?

When you’re in business, it is important to look at the future investment you will make and whether that will pay off in the end. There is no point in sinking even more resources into a bad decision, simply because you have already invested so much. Seems logical right? It is, but humans have a tendency to fall for it anyway.

Example 1

You have invested in research and development on creation of a new product, but the market has turned and that product may no longer be as relevant to the market. If you continue to try to market, produce and sell the product, you will spend more money and time to make it work. Is it worth the extra cost or should you switch tactics?

Example 2

You are enmeshed in a bad business relationship, you have spent years building a business with your best friend only to find it is not working out. If you continue in the relationship it may end up in a messy breakup or worse a legal battle. Do you call it now and find a way to end it amicably, or keep trying to make it work, despite everything telling you it isn’t?

How do you learn to let go and make better decisions?

By assessing the future cost of the situation, rather than the past investment, you can overcome the sunk cost fallacy fallout.

  • Do some new market research to check the viability of your idea / product. Invest a little before investing a lot.
  • Model the financial outcomes for various scenarios to see how they will play out.
  • Run your decision by a mentor or coach for an arm length viewpoint to help remove the emotional attachment you may have. Be open to criticism.
  • Engage a board for hire to assess the viability of your business / plan, they won’t mince words.

Make your decision based on these facts, rather than thinking of how much you have already put in. It certainly smart to try to get a return on your investment, but if it’s a lost cause, then you only stand to lose more if you continue on the same path. Sometimes cutting your losses is the more difficult, but smartest move you will ever make.