The sunk-cost fallacy is a common psychological bias in which people continue investing time, resources, or money into something that is no longer delivering positive returns. This often results from a fearful belief that after having invested so much in something, giving up on it would result in all of those investments going to waste.
Why is the sunk-cost fallacy bad for business?
The sunk-cost fallacy can have disastrous consequences for businesses as it leads to poor decision-making. Business owners who fall victim to this bias may continue paying for a service, tool, or even personnel even if these are no longer providing commensurate value to the company. For instance, a manager might feel like keeping a mediocre or poor-performing employee just because the company has given that person intensive training for several years. As a result, they end up missing opportunities to bolster their workforce with highly skilled and dedicated team members.
How can business owners avoid the sunk-cost fallacy?
A study found that people are likely to sacrifice their own pleasure if it means they don't waste resources. This indicates that the sunk-cost bias is deeply rooted in human psychology and that avoiding it requires a considerable change in mindset. Here are some tips to consider:
Identify a goal and keep it in mind
Define a goal you want to achieve. Write down this goal and describe it in as detailed a manner as you can. Put this description somewhere close at hand so you can retrieve it anytime you need to. For example, you can write down your vision for your business on a piece of paper that you can then keep in your wallet.
Suppose you described your business as having a secure and efficient IT infrastructure. You realize that migrating to the cloud would produce better results, but you’ve already spent resources on an in-house IT system. Reviewing your goals will enable you to proceed with migration anyway as it’s projected to benefit your business more.
Accept the possibility of loss
Sometimes, people hold on to a lost cause because they cannot accept having failed. Before you invest in any product, technology, or endeavor, keep in mind that you are never guaranteed positive results at all times. Recognizing this reality helps you disengage and move on when better opportunities arise.
Say goodbye to personal attachments
When you become personally attached to your products or endeavors, you feel that discontinuing them would be a painful or shameful experience. Fear then blinds you to sunk costs and makes it harder to make profitable decisions., making it harder for you to make profitable decisions. Keep in mind that it isn't about you, but your business.
Be objective and focus on facts
It's normal to be optimistic with every new start, whether it's a new vendor, employee, technology, or project. Ideally, you should take time to examine whether these things are paying off as you initially expected. During your assessment, be objective and stick to facts. Consider factors such as current ROI and future risks. This way, you can make decisions that are data-driven instead of being influenced by emotions.
Give mindfulness a try
Mindfulness can improve people's resistance to sunk-cost bias by helping them focus on the present and their own thoughts and feelings. As a result, you become less concerned about the things that happened in the past and the events that have yet to take place in the future. Mindfulness may also help ease feelings of anxiety during times when you need to make critical decisions.
One way to avoid the negative effects of sunk-cost bias is to have experts on your side who understand your business’s needs. When it comes to your IT investments, our IT specialists at [company_short] can help you identify the solutions that will improve your business’s bottom line. We'll also help you spot and avoid sunk costs so that your IT infrastructure is always cost-efficient. Contact us today to get started.