September 2, 2021
What’s it all about?
If so, you might have fallen victim to the sunk cost fallacy.
A sunk cost is a cost which has already been incurred and cannot be recovered. The cost could be monetary but could also be your time or effort. The sunk cost fallacy occurs when we continue to invest in something – e.g., a behaviour or endeavour – purely because we’ve already invested in it.
Why’s it a fallacy?
It’s a fallacy because it can lead to irrational decision making. Prior investment – whether resulting in returns or not – doesn’t necessarily mean that further investment is a good idea.
Consider the following:
1. You’ve bought a ticket to the theatre for £20 but upon arrival you realise that you’ve lost it.
Do you buy another ticket?
You’re planning to buy your ticket at the theatre. When you arrive, you realise you’ve lost a £20 note.
Do you still buy the ticket?
Most people would still buy a ticket after losing the £20 note but wouldn’t if they’d already bought and then lost the ticket – despite the fact that the 2 scenarios are equivalent.
Gambling is a classic example of the sunk cost fallacy at work. Despite losing money, people feel compelled to keep throwing money at the table in hope of returns. Continuing to work at and invest in a failing business venture is a common example too.
How does it work?
The sunk cost fallacy occurs because we’re loss averse. Our desire to not lose is roughly twice as strong as our desire to gain. Thereby, even if we are witnessing losses – be it in regard to our money, status, relationships, wellbeing – we feel compelled to keep investing to try to reverse that loss and turn it into a gain.
It’s why gambling can be so addictive. You lose, lose, lose, and then finally win. When you win, you don’t only gain – you also don’t lose. So, a post-lose win has about 3 times the positive psychological impact of a win that wasn’t preceded by a loss.
The sunk cost fallacy at play
If you’ve not heard of Farmville, where have you been?
At it’s peak it had 84 million monthly active users!
The aim of the game is to scale-up your farm from a humble patch of land to an industrial-scale business, selling arable and non-arable produce.
Stakeholders of the app benefit from the sunk cost fallacy as it’s what sucks users in on a daily basis. If users don’t check-in, everything they’ve worked so hard to create would die – meaning wasted time, money & effort. If they do check-in, they reap rewards – both from seeing the fruits of their labour flourish, and by earning money to invest on the farm.
Farmville’s success has paved the way for other social game developers to cash-in on our predicably irrational behaviour.
So, what’s the importance for the tech industry?
The success of any technology company, whether established or new, lives or dies by successful innovation. The very nature of tech companies might lead you to assume that they ‘get’ innovation and how best to approach it. However, this is not the case.
Tech companies, more than most, suffer from what we call the ‘escalation of commitment’. This is where companies double down on investments (i.e., time, money, effort) in innovation even when they key gateways have been missed, budgets have spiralled out of control, and stakeholders have lost sight of what the end goal is.
To help tech brands pull the plug on bad innovation, we’ve detailed 5 steps to follow:
Step 1: Forget past successes – Just because your last upgrade ‘nailed it’, doesn’t mean the next will follow suit. Often our past successes delude our future decisions. Focus on the here-and-now & make decisions based on facts which are relevant.
Step 2: Think like Einstein – That is to say, think like a scientist. To make logical & unbiased decisions, you must do your research. Our thoughts, beliefs & attitudes skew our judgment, rendering them biased (see, the endowment effect). The key is in getting an outsider’s perspective. Whether it validates or challenge your ideas, the feedback of an unbiased outsider is invaluable.
Step 3: Consider the opportunity cost – Working out what you’ll gain, rather than what you’ll lose by abandoning an idea will help you break free from the sunk cost fallacy. Ask yourself what else could be achieved if you were to invest the time, money & effort elsewhere.
Step 4: Review your portfolio – To make decisions which’ll relish gains, consider your entire portfolio. Brainstorm updates or improvements which could be made for each product. Always remember to check for whitespace too.
Step 5: Embrace the pain – Finally, only once you’ve followed the previous 4 steps, you need to embrace the pain. Not every endeavour can be successful. Failure must be accepted, not clung on to. So, cut your losses & quit while you’re still ahead.