Earlier this year, in one of my first issues of the Vulnerable U Newsletter, I wrote my thoughts on something I’d read from Stephen Dubner and Steven Levitt, authors of Freakonomics and Think Like a Freak. The concept they explored in recent research, Sunk Cost Fallacy, has come up again this week as I build my own business and have more conversations about how I’m investing my time, energy, and other resources. You can read the overview of my original thoughts here.
Now, let’s take this idea a little further.
Deep Dive into the Sunk Cost Fallacy
The Sunk Cost Fallacy is a powerful and pervasive cognitive bias that affects decision-making in various aspects of our lives, from personal relationships to business investments. At its core, this fallacy represents our reluctance to abandon a course of action or project due to the time, money, or effort we’ve already invested, even when continuing might not be the best decision.
Think: I refuse to break up with my high school partner because my parents would enjoy it too much. I MUST marry this person or subject myself to the lifetime torture of “I told you so”.
Origins of the Fallacy
The term “sunk cost” comes from economics and refers to any past cost that has already been incurred and cannot be recovered. In business, these might be investments in research and development, marketing campaigns, or infrastructure.
In our personal lives, it could be time spent in a relationship, money spent on a hobby, or effort put into a project.
Why Do We Fall for It?
Several psychological factors contribute to the Sunk Cost Fallacy:
- Loss Aversion: Humans are naturally more affected by losses than equivalent gains. The pain of losing $100, for instance, is typically more intense than the pleasure of gaining the same amount. This aversion to loss makes us cling to our past investments, fearing that abandoning them would mean accepting a loss.
- Commitment and Consistency: As described by psychologist Robert Cialdini, once we commit to something, we feel a strong need to remain consistent with that commitment. Abandoning a project we’ve invested in feels like a betrayal of our past selves.
- Emotional Attachment: Over time, we become emotionally attached to our projects or decisions. This attachment can cloud our judgment, making it difficult to see the situation objectively.
- Fear of Regret: We often fear that if we abandon a project now, we might regret it later if it eventually succeeds or becomes valuable.
Implications in Tech
Sunk Cost Fallacy can be particularly detrimental in tech. Companies might continue investing in outdated technologies or platforms simply because they’ve already spent significant resources on them. This can lead to missed opportunities as they fail to adapt to newer, more efficient solutions.
For instance, a company might stick with an older software system because they’ve invested heavily in its customization, even when newer systems offer better functionality and security. This adherence to the old system, driven by the Sunk Cost Fallacy, can hinder innovation and growth.
I’ve seen this happen firsthand at more than one company I’ve worked for. It’s incredibly frustrating to experience, especially for employees with no decision-making power.
Being able to see from an outside perspective but having no control over the outcome is kind of painful.
Watching really cool, innovative new technologies fly past you as your company clings to something that just isn’t panning out how they hoped is a next-level employment hell.
Overcoming the Sunk Cost Fallacy
Recognizing the Sunk Cost Fallacy is the first step to overcoming it. Decision-makers could do the following three things to help prevent them from getting stuck:
- Focus on Future Value: Focus on the future benefits and costs of a project rather than what has already been invested.
- Seek External Perspectives: Sometimes, an outsider’s view can provide clarity. Consult with colleagues, industry peers, or experts who aren’t emotionally or financially invested in the decision.
- Set Limits: Before starting a project or investment, define clear criteria for success and failure. If a project doesn’t meet these criteria within a set timeframe, it might be time to reconsider.
Benefits of Quitting
Right besides failing, quitting is one of those things that is drilled into kids. Don’t quit. Don’t fail. So it isn’t really something we learn how to do well.
Even as adults, the word “quitting” usually carries negative connotations and often has expectations attached to it. You can quit if you have a good enough reason; another job offer that pays more, your partner was cheating, you got hurt and can’t play the sport anymore.
However, strategic quitting can offer a range of benefits, both tangible and intangible. Here are some of the advantages of knowing when to walk away:
- Resource Reallocation
- Mental and Emotional Relief
- Avoiding the Sunk Cost Trap
- Fostering a Flexible or Growth Mindset
- Risk Mitigation
- Opportunity for Reflection and Learning
- Boosting Team Morale
- Encouraging Innovation
So, let’s say you are a believer now. Quitting can be awesome! What do you do next? How do you know if / when you are ready to move on? Here’s a good starting point.
Four Questions To Determine if You Are Ready to Quit
- Is the project still aligned with your goals?
As your organization evolves, its goals and priorities may change. If a project is no longer contributing to your strategic objectives, it’s worth considering whether it’s time to abandon it and invest your resources elsewhere.
- Do the costs outweigh the benefits?
If the resources required to complete a technology project have exceeded the anticipated benefits, or if it’s clear that they will, it’s time to reevaluate. Be honest with yourself about the true costs of the project, including time, money, and opportunity costs.
- Has the industry changed?
Innovations and breakthroughs can quickly make a project obsolete. If new technologies or platforms have emerged that would better serve your needs, it might be time to pivot and adapt to the evolving industry. Think of all the data center engineering teams in the middle of a build out when AWS started to blow up.
- Is team morale suffering?
If a project is causing significant stress and frustration among team members, it could be a sign that it’s time to reevaluate. A toxic environment can lead to burnout and turnover, which can ultimately harm your organization’s overall success.
With these simple questions, you’ll start to learn whether or not you are ready to move on to the next phase of your career, project, relationship, or adventure.
No matter what, it requires great strength to know when to quit. And the more we exercise the Sunk Cost Fallacy prevention muscle, the more resilient that part of us becomes. So here’s your challenge…
When have you quit something very difficult, but ultimately it was for the best? Or, more intriguingly, what example in your life were you thinking about the entire time you read this blog? Is it time to do something about it?