Exploring The Sunk Cost Fallacy

My current personal development read is a best seller in the startup space - Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel (recommended for entrepreneurs and anyone working in/with Startups)

One of the points I highlighted (though not a primary bone of contention by the author) is the Sunk Cost Fallacy. This is not a new concept, but today, let's explore what it might mean for you.

The Sunk Cost Fallacy is a cognitive bias that people possess when they have invested so much time, effort, or money into a business or project and thus are unable to cut their losses when things do not work according to plan, they rather intensify more resources into said business or project.

The easiest way to understand this is to picture a toxic relationship that a person might have been in for five years. They may think, "Five years! "How do I just throw five years of my life away to start all over again?" Said person might choose to stay even when the logical choice is to trade five years for eternal peace.

This may not be your case but think of business risks, career choices, and investment decisions that you could have stuck with this same mindset.

• I know people who lost money in investments because they had already lost so much and couldn't pull out despite the warning signs
• I know people who stayed years in a career they found no fulfillment in because they had gotten a fancy degree and built a shiny LinkedIn persona
• I know people who stayed with a bad growth strategy because the team had already spent so much time and effort on it and bragged to the board and on social media.

You may believe "I have put so much into this, there MUST be a benefit there somewhere!" However, recognizing a bad investment and knowing when to cut the loss is a vital skill to build.

Now, this is not an easy concept to admit, especially for indefinite optimists (people who believe that things will work out fine in the future irrespective of the past or the current state of things). Realists, on the other hand, generally find it easier to cut losses and move on.?

However, being an indefinite realist is not my recommendation (I have encountered realists who are so risk-averse that they cut off projects too early at the sight of some discomfort or economic/political/financial pushback). We should know by now that some of the greatest successes come at the cost of some great risks and being able to wield the wind that causes others to fail to your advantage.

So what's the best way to approach this such that we don't keep pouring water on a rock, or giving up just as a seed is about to sprout?

Prioritizing strategic thinking over emotive thinking!

When you think strategy, you put the future in place of your past and your present.

A decision may feel good in the moment but be detrimental to your future, in contrast, a decision may feel painful in the moment but be a compounding interest formula for your future.

What I love the most about this insight is that it can be applied in various areas of your life - professionally and personally.

Here are a few guiding questions:

1. Am I thinking strategically about my decisions or is there another driving force?
2. What are some sunk costs I am unwilling to address?
3. In what ways do my current emotions affect my decision making and would I regret this in 5 years?

Key takeaways for professionals

• Prioritize strategic thinking: When making decisions, focus on the future potential of a project rather than dwelling on past investments.
• Be mindful of your bias: Recognize the cognitive bias of the sunk cost fallacy and actively work to avoid it.
• Evaluate projects objectively: Use data and metrics to assess the viability of a project, rather than relying solely on emotional attachment.
• Know when to pivot or cut losses: If a project is not yielding desired results, be willing to pivot or cut losses to allocate resources to more promising opportunities.

Hope you enjoyed this read. Please feel free to share your thoughts or ask any questions and I will respond to them!

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Keep Growing and Exploring!

Joke Shalom Akintara

Growth Product Manager | Curator of "Growth Notes"