Have you ever ordered too much food at a restaurant, only to end up with a stomach ache because you felt you needed to clear your plate?
Have you ever held on to a stock far to long, watching it go down day after day as your losses mount, reluctant to sell until somehow you get back to even?
Or perhaps more relevant to the topic of entrepreneurship, have you ever been reluctant to make a meaningful change in your company because of all of the time, money and effort that’s been invested so far?
All of these are examples of the sunk cost fallacy at work. Put simply, the sunk cost fallacy comes into play when we consider the value of past investments when making decisions about the future.
Which is a trap.
Because simply having invested significant time, money or effort has no bearing today on whether the project you’re focused on will be successful tomorrow.
That evaluation of potential future success has to be made independent of the consideration of past investments. You have to look at the metrics, the financial projections and data on past performance. Ground yourself in facts, but ignore all that you’ve put into the effort to get here.
It’s incredibly hard to do. But the sunk cost fallacy is rooted in behavioral economics and human psychology. We make bad decisions all of the time because we don’t want to throw away all of that hard work.
As a leader, it’s particularly difficult to tell your team that you’re changing direction. That their hard work is going in the bin because no matter how hard they try, you won’t achieve the desired result.
But the only thing harder than making that decision now, is putting even more time, money and effort into the initiative, only to learn that lesson later on down the road.
Burning cash and losing precious time all along the way.
So when you are at that restaurant and that huge plate of food shows up, you have a decision to make. The money is already spent. The food has already been prepared. It is either going in your belly or in the trash. That’s all sunk cost. It’s all in the past. The only question is whether you are going to eat it.
And the answer will determine how you feel when you walk out of the restaurant.