Today I want to shed light on an incredibly prevalent mental phenomena that, to some extent, is present in every human being’s behavior.
It’s a cancer of thinking that rots logic and chokes common sense.
This psychological tendency has been skewing the effectiveness of your decision making and, chances are, you’ve been completely unaware of it. For entrepreneurs, good decision making is synonymous with success – so this post is an important one.
I’m talking about the phenomenon known as Sunk Cost Bias.
The name almost says it all, but I’ll break it down a little further. Sunk Cost Bias is the tendency entrepreneurs have to continue investing (time, money or energy) into a project based not on the objective merits of the project, but rather the impact of “sunk costs” – the previously invested capital now lost.
Sunk Cost Bias is what makes a venture capitalist uncomfortably invest another million into a dicey venture… not because it’s a sound investment with solid promise of return, but because she’s already pumped a previous five million in.
Had she not previously invested considerably, the same investor would (upon on hearing of the start up’s situation) consider the whole thing a bad deal. However, because she has already committed (both financially and emotionally), the Sunk Cost Bias kicks into action.
To really understand that power of Sunk Cost Bias, we need to consider a non-business example:
When an unhappy man considers ending the dysfunctional relationship with his girlfriend of three years, he’s hesitant. He tells himself to “see if they can make it work”. After all, they’ve made it this far – surely there’s something worth saving there, right?
Maybe. Maybe not. Either way, the Sunk Cost Bias is influencing our hypothetical Romeo’s decision making. Because of the investment he’s made (time, money & energy!) over three years, he’s more inclined to continue investing into the relationship. Not because the relationship’s future is necessarily looking good (in fact, it’s looking terrible!) but simply because of what he’s already sunk into it. Giving all that up would mean admitting, to oneself and others, that it was all a waste.
Sunk Cost Bias occurs (in business, love and life) when we invest anything substantial. Our desire to believe our investment will “work out” and even to invest “just a little bit more” in the hopes that things will improve – is a desire driven by the Sunk Cost Bias pushing at our unconscious mind.
How radically different would our hypothetical example react if he had a first date as dysfunctional as a night out with his girlfriend of three years? How coldly calculating would a venture capitalist be when assessing a floundering business that had eaten millions of other people’s money and was still in need of more?
When we invest into something, we give it energy – in the form of money, love, time or physical effort. This exchange of energy tugs at our emotions, creates the bias and robs us of the ability to objectively see things as they are. We begin to act without logic.
As an entrepreneur, the Sunk Cost Bias effects you whether you like it or not. You don’t even have to be an investor.
How many projects have you begun, started to realize were doomed… but kept slogging away at, well longer than you should have?
If it happened, Sunk Cost Bias ensnared your senses in it’s web of seductive (and ludicrous) reasoning.
How often have you continued to work with a partner, client or colleague when you knew the relationship was broken… but kept hoping that “trying” would change things?
If that was you, you couldn’t let go of the energy that you threw into the abyss. By pretending things would work out, you could pretend that nothing had been wasted.
Sunk Cost Bias is distorting our decisions everywhere – relationships, businesses and life!
Ever waited for a bus? Ever waited for a bus that was really late?
Did you rationalize that the longer you waited, the more “likely” the bus was to finally arrive the moment you gave up and left?
Ever have to wait long enough that you proved that idea either bull**** or just stupid?
The bus stop scenario (and thought pattern) is a classic example of Sunk Cost Bias in action and it occurs at phenomenal extremes. The more you commit the more you want to commit.
Sunk Cost Bias doesn’t make sense (although the psychological rationale is clear) and it can cause major trouble for entrepreneurs. Any time a business owner is blinded to the reality that they need to cut their losses and walk, the phenomena is in play.
Business requires us, at times, to be cold and calculating. If rational logic is the entrepreneur’s superpower – Sunk Cost Bias is kryptonite.
You can’t get rid of Sunk Cost Bias, you can only be more aware of it.
Awareness is the first step. Admitting it is the second. Resistance is the third and it isn’t futile… it’s just damn difficult.
Everyone has a Sunk Cost Bias example lurking in their entrepreneurial history. We’ve all had decisions distorted. Some folks are lucky enough to have examples where Sunk Cost Bias made them lucky – where it actually paid off.
When has Sunk Cost Bias effected you? Share a tale in the comment section…
The hard part is knowing when the Sunk Cost Bias will work in my favor, and when it will not. Ask my partner of 30 years what kept us from blowing it all up at the 7, 13 and 20 year marks. The Fairy Tale answer is our deep love for one another and our obvious “destiny” to be together. Horsesh*t! At those critical moments, there was nothing so ephemeral at work. In gritty, rational analysis, sunk cost bias kept us in place long enough to come to (or return to) our senses, even during the many years we were not married. The sheer cost/hassle of untangling was the thing that made “Growing Beyond Our Differences” seem like the “Path of Least Resistance.”
And I have to say, the sunk cost bias probably keeps me from cracking under the strain. Isn’t it only in retrospect that the sunk cost bias looks like the “Sunk Cost Bias” and not “His/Her Astonishing Tenacity in the Face of Adversity?” Sometimes, we “push through” because there just doesn’t seem to be another option based on what we already sunk into the endeavor. Maybe Buddhists would see this as delusional “Attachment.” But what is a really creative entrepreneur if not willing to be occasionally delusional?
At it’s worst, however, “sunk cost bias” keeps us hoping we can change things when we can’t–things like abusive people and dead end industries.
I understand exactly what you are saying in terms of it’s impact on rational thought, however. Like all biases, it’s the least destructive when we give it credit for the considerable force it can be. Then it can be held visibly balanced with all other “rational” considerations.
As always, Peter, compelling and thoughtfully crafted.
Cory
Hey Cory,
I’m super grateful for your lengthy and eloquent comment here – I actually attempted to include some serious counter examples in this post, to balance my point out in more of an essay sense. I deleted most of that material in the hope that my readers would fill the gap, not with hypotheticals, but with solid real would tales.
You nailed it in the first reply!
So for others reading: pay close attention to Cory’s thoughts here – SCB is often a necessary ingredient in unconventional success…. And as entrepreneurs, when do we shoot for anything BUT…?
Peter, Love your articles. I too am a therapist, and have a PhD in Clinical Community Psychology. I now work with people to help them figure out their business models and create awesome online presence to get their goals met with social media and other tools. I often wonder how people in my niche can do their jobs effectively without the psychology training. I see people doing this sunk cost bias all of the time. I great example is someone who has a Flash website. They Know it is not working for them ( no SEO or ability to add content and doesn’t show up on iPhone or iAnythings) yet, they will not give it up since it cost so much to build in the first place and they like the moving parts.
Go figure.
Just wanted to let you know I’m a fan!
Hey Judi, thanks for joining the discussion here!
Interesting combo of skills you’re rocking – the psych thing plus all that tactical web stuff. One thing’s for sure: If you work with entrepreneurs, you’ll witness SCB weekly.
Huh. Shoulda met you four years ago, before I flushed 30K into a shop I’d already stuck 30K in, and somewhere deep down I knew it wasn’t going to work. But as you so astutely point out, I felt that it would be worth it and things would turn around. It wasn’t and they didn’t.
Good post Peter. Everyone should know this and realise how important – and true – it really is.
Hey Martin! Loving the new avatar… you look like a whole different person!
Another classic example – worth it though, if you learned something valuable 🙂
Thanks Peter. I figured it was about time to reveal myself a bit more.
And yes, it was worth it. In fact, I learned so much that once I put that company on the backburner, all I had to do was use the knowledge and pour it into my new copywriting business and hey presto: Profit. (Well, not all that instantly, but still)
It was expensive schooling but so very much worth every penny.
So, how does a person get an avatar published in these comments?
Not that I’m particularly pretty. But I think better looking than a shadow 🙂
Will
https://en.gravatar.com/
Upload a pic and you’re done 🙂
Yay! I’m no longer just a shadow!
Thanks, Martin.
Will
Good to see you Will! You’ll have to keep commenting, now that you’ve got a pic 😉
Fortunately, I’ve never thrown one million after a bad five. My Sunk Cost Bias situations have been less remarkable.
I used the Windows operating system since version 3.0. Had a lot of emotion and learning invested in it and had accumulated a lot of skill. When I married, my wife used a Mac.
For over 5 years, I put up with freezes and cantankerousness and the occasional blue screen of death while my wife’s computer merrily hummed along. Told myself I didn’t have time to learn a whole new operating system. Told myself I needed a PC for compatibility with what most of our clients use. Came up with lots of very logical reasons for keeping on using a PC.
Finally, I broke myself down and just went ahead and got a Mac. We’ve been married 12 years, so I got the Mac over 6 years ago. It took several days to familiarize myself with the new operating system and several weeks to become comfortable with it and several months to use it intuitively.
And you know what? My production went *way* up. When I no longer had to fight with my computer, I could focus on my work without that unnerving distraction.
Another SCB was a client who had ongoing work and, at first, paid right on time. After a while, payment began to be a little late. Payment always came, just a little longer after due date every time.
We needed the money, and the money did in fact arrive, just later than it was supposed to. So I kept working for the client. But payment kept arriving later and later. Got to the point where the client owed us so much money that we couldn’t afford to fire him, thinking the outstanding balance would never be paid.
Finally, I realized it was well worth losing the outstanding balance to get rid of the stress of collecting and wondering and the bad feelings associated with the situation.
When we fired the client, other clients showed up to fill the gap. I was able to do better work and accomplish it faster without my attention stuck on the bad client.
One more SCB? I am a computer programmer. Very good with Perl. Have a decade of experience programming with Perl. Then PHP came along. Boy, did I ever resist it. How dare “they” come up with something new just when I reach the expert stage of something else!
But I did not resist this as much as the other two SCB’s. Perl was, after all, my fourth programming language.
I am now about as good with PHP as I am with Perl. Heh 🙂
Those three SCB’s taught me something. When feeling compelled to invest additional time, energy, or emotions into preserving or improving a situation, step back and approach the decision as if evaluating it for the first time.
Not that I always do it. I’m human, after all. But one does tend to learn from life experiences.
“When feeling compelled to invest additional time, energy, or emotions into preserving or improving a situation, step back and approach the decision as if evaluating it for the first time.”
Terrific nutshell, Will! 😀
Hey Will, these are incredibly useful examples to share – this is exactly the kind of comment I was hoping to read after posting my article.
It’s incredible how Sunk Cost Bias is even present in things as simple as LEARNING NEW SKILLS – I love the programming language example! The mac vs PC thing is hilarious… I think anyone who’s made “the switch” did so after a considerable period of battling the SCB.
Vista pushed me over the edge 😉
Wow, Peter! The timing of your article is serendipitous for me. Just two hours ago, I cancelled an annual-renewal web business that I never got off the ground, as I could not understand a variety of structures within it. My fault there. And, instead, I opted for a more-expensive training in that field. So that I can create my own business systems. Your words re-affirmed my faith in my decision. Thanks for that.
And, my SCB story is more prominent in relationships than in business, at the moment :D. I was made to feel a monster for giving up on relationships that were gangrenous. So, I developed unnecessary “empathy” (self-sabotage???) for others while neglecting my own growth.
A friend recently reminded me that, caught in some personal drama, I had lost sight of my goals and that I have only myself to hold responsible for that. So, yes, trying to salvage what I can there.
Thanks for posting this!
Hey Anusha,
My secret goal, whenever I hit publish on a post, is to touch a couple of readers in that perfect “right time right place” … so I’m super glad that reading this helped validate a good decision you made.
There ain’t nothing quite like hearing you made a good call. 🙂
Great points, but often hard to do in real life. How does one know that a project is doomed? Hindsight is 20-20 as we all know. I’m evaluating a project now for SCB and can see the merits in keeping it going, but there’s also an argument to stop it now. The project generates profit, has interest from mainstream media, but it isn’t performing at the level I had hoped. Would continuing be a sunk cost or not? I can’t predict the future and have to hedge the bet a bit no matter what decision I make.
Hey Susan!
Nice to hear from a commenter who’s living in a potential SCB moment!
I think profit is something important to pay attention… and also the personal “ROI” you receive from the energy/time you have to invest in the project. If you’re making a profit with minimal investment of effort… it’s hardly a Sunk Cost – although, if you’re ultra ambitious, you might disagree.
Clearly, this isn’t a black and white scenario – but is it worth waiting around for your many-shade-o-grey to swing one way or the other? How valuable is your TIME?
Here’s another perspective: understanding who in your client market has sunk cost bias, and where it will work against you.
What I do is innovative for law firms – not many have used it. Many firms just won’t ‘get’ my service. They’re too invested in their existing (ineffectual 😛 ) marketing. This represents a sunk cost bias where they’ve expended so many resources into their current marketing and branding, with such direct partner oversight into the decisions, that they’re not going to change that… even if what they do right now is not based on professional differentiation techniques.
Cost of the previous decisions aside, it would also represent a tacit admittance that what they did before wasn’t effective.
So I don’t target those firms. Instead my ideal clients are the new wave of innovative legal service providers that are actively looking to do new things and don’t have the sunk cost bias. Many of these aren’t even law firms, but rather startups that are trying to take business from firms.
Sunk cost bias is an important point that everyone with a new service needs to account for. Sometimes you can mitigate it by positioning your service or product in a way that implicitly makes sense – like what I do by saying I give life to trademarks. It’s the legal explanation of copywriting. Sometimes, though, you’ve got to bear in mind that the bias will be too strong to overcome, and not go after those clients.
Hey Patrick!
This comment adds unbelievable value to the discussion here – you make a super important point!
Sunk Cost Bias gets in the way of almost all B2B sales interactions… yours is a perfect example. Another great one is any kind of software sales – just ask an IT manager what it would mean to “let go” of their old, broken, ineffective systems and swap them out for hot new awesome ones!
Knowing about Sunk Cost Bias is crucial if you have to sell things to people – since, as you say, you absolutely need to be able to identify those folks who are going to cling miserably to their sinking ship rather than allow you to help them.
Wow! Great perspective, gentlemen…Patrick, I am slapping my forehead realizing how much SCB impacts the entire US healthcare system, which has huge implications in any attempt to actually fix it. Yikes, call in the small, nimble mammals! T-Rex is about to hit the ground!
Super great point now it puts everything into perspective and makes you really think. I think it has a lot to do with emotions, sense of ownership.
I work in video and spend a lot of time video editing. I’m not sure how well this analogy will hold, but given that the experience happened only yesterday, I think it’s worth mentioning. Anyone slightly tech-savvy will get the idea of “rendering”. In video language this is basically creating a video file based on an edit, or in this case, exporting the file. Working with new technologies, at times, they can be beasts. I was having a HUGE headache working through the bugs in my latest project, getting the damn thing to export. It would render for 30 mins, reach 49% and freeze. And I faced a huge dilemma…I’ve just invested in this export…do I wait (spend more time), or cancel and start on a new strategy with new settings, etc. This happened a number of incredibly aggravating times. Eventually, the elegant solution arrived; exporting the file in small 1 minute chunks. If these froze or failed, I would know quickly to try a new tactic. As it turned out, my system (for whatever reason) had no problem rendering the small files.
The analogy is clumsy, but I think it has some value. Not entirely sure of the conclusion, but maybe it’s best to manage our Sunk Cost Bias in small chunks? Spread our investments thinner? Food for thought…
Hey Steve! Thanks for commenting dude.
I like the analogy because I’ve totally been there and done that, back in the days when I used to play with video editing too. Another perfect example of the same phenomena messin’ with out heads.
Like your computer, it becomes a lot easier for our brains to avoid losing their shit when we manage anything in smaller chunks.