The Sunk Cost Fallacy

Concorde – the sunk cost fallacy

I have two pieces of advice today.

The first has been prompted by a client I am currently working with.¬†How many times have we heard it? W’ve invested too much in this project (or product, or service, or campaign, just delete as applicable!) to throw it all away. We know it’s no good and doesn’t do what we wanted, but we can’t waste all that money so we must carry on. My client knows that their new website development is going horribly wrong and it would be better to start afresh, but can’t bring themselves to accept the fact.

This attitude is so pervasive that it even has a nickname, The Concord Effect, after the supersonic plane whose development was continued under two governments even though it became clear very early on that it would never be economic.

In many ways this seems a perfectly reasonable attitude. No one likes waste, and to stop something after lots of money has been poured into it seems very wasteful. This is particularly so with public projects where the scrutiny is severe, but businesses act in just the same way. Plus, there are some less than rational reasons for acting in this way, not least of which is the desire not to lose face or credibility. People can get very emotionally attached to pet projects.

In fact, at any point in time, the money and resource that has gone into a project (or product etc) is gone. It has been spent, it has been used up, it cannot be recovered. The only thing that matters is what is the most rational decision to make going forward. If something has to be thrown away and the project started again, then so be it.The question that the business must answer is this: given the assets, the financial resources, time available and the human resources available to the business right now, where should they be focused? Note that the assets do include whatever has been developed so far in the project. If the answer is that the business will be better off starting afresh, then you have to be brave enough to take that decision.

Funnily enough, this particular error is not one that very young children or other primates make. They treat any decision as a new decision, and don’t worry about what has happened in the past.

Can you make as good a decision as your children?

My strong advice is that, whenever you are making important decisions about any project/product/service, you challenge yourself as to whether you are making the sunk cost fallacy.

And the other bit of advice? Last weekend I played hockey and the ball was hit onto my left hand from 5 metres with considerable force. Typing has just become an interesting challenge. The advice is, if you are going to play rough sports, wear padding and lots of it!