The Art Of Marketing and eCommerce Series

Logical Fallacies In Online Business Part 5: Sunk Cost Fallacy




Avoid The “Double-Down” Mentality With All Of Your Might

One of the easiest thinking errors that occur in our daily lives is when we assume that because an investment of some sort was made, we are then invested and committed. If you’ve ever ordered some food, a cocktail, gone to the movies, or have attended a concert, and was not thoroughly impressed or pleased with what you received, you assume that because it’s already paid for, it should be consumed… fully and completely. Even if that means not enjoying yourself in the meantime. You should eat the meal, drink the cocktail, watch the full movie, and listen to the entire concert because well… you’d hate to waste money already spent. But that is the Sunk Cost Fallacy working in full force. People typically feel guilty when they’re wasteful of certain things such as food, money, and even time. But the idea that you are gaining more by enduring something unpleasant simply because you don’t want to be wasteful is actually counter productive.

Rather than just accepting that the cost was sunk, or lost, you invest more (time, money, energy) to make it “feel” better. But really all you’ve done was become more wasteful. Why finish a meal you don’t enjoy (unless of course your hungry)? Why drink a cocktail that doesn’t suit your palate (unless of course your drowning your problems)? Why finish a movie you don’t enjoy (unless of course you’re on a date)? And why sit through an entire concert when you’d well rather listen to something better on your car ride home? If the cost is lost, and there is no further potential for anything positive, cut your losses and move on. This isn’t even mentioning or tallying the value lost from opportunities squandered in the meantime.

In business, at times, we have to swallow the hard truth and accept the fact that things sometimes don’t pan out as planned. The factors for success online are both varied and unpredictable. Whether that is a marketing campaign, a product development, a new service offering, a trial testing, new site launch, a particular content campaign, social media strategy, or anything else. “The best laid plans of mice and men often go awry.” Managers and owners would do well to heed this warning. You should always be aware that regardless of how well prepared you believe you are, or how well planned something may have been, there is always, ALWAYS, the chance for failure to peak it’s ugly and sobering little head out and surprise you. Don’t be blinded by the allure and temptation of success, and especially success derived from your own wonderfully and masterfully planned designs. After all, few parents can actually call their own kids ugly, but statistically, ugly kids do exist, and their parents are unable to recognize or admit that fact.

Here’s another example. How often have you heard this excuse; “But we’ve invested so much already!? We can’t stop now, we need to have something to show for it…” You can almost dissect the statement itself and understand that you should proceed with absolute caution if this is the conversation you’re hearing. “Invested so much” : if it was beyond your means it shouldn’t have been considered in the first place. “Can’t stop now” : Can’t stop or won’t stop? Can’t implies an inability to actually stop which is typically always possible. The question then is why “won’t” you? Because you’re afraid to lose the money that was already invested, sunk, and lost. It no longer exists, but you can imagine that it does, that the value is still present somewhere… but that is a dangerous path of self-convincing. “We need to have something to show for it.” : “Need” sounds awfully desperate, and you can’t force a positive outcome from any situation, especially those arising from desperation. You can certainly influence it, and strongly at times, but you cannot with 100% certainty ensure a positive outcome will arise. That is not being realistic, that is not being logical. If you hear desperate words in a business meeting simply be cautious because typically those words are followed by desperate measures. That is, in essence, the action and consequence of the Sunk Cost Fallacy. Desperate words followed by desperate measures. “We’ve lost so much money!”, “But it’s such a great idea”, “We just need to upgrade” …  “It just means it’s time to Double-Down Mmkay!”  (Oddly that clip is very suiting to this topic… and hilariously so).

In your business, when you start discussing the progress of projects, campaigns, strategies, and tactics that have been implemented and are in play, you should never become overly attached to anything simply because of the initial investment and cost (or your ego). When the data and numbers come in, if something appears to be performing poorly or sub-par, truly consider whether or not it is worth proceeding with. Becoming nervous, agitated, and afraid that all of your investment will be lost doesn’t help you determine what the best course of action is to take. You should always plan with a clear and calm mind. Otherwise, falling for the Sunk Cost Fallacy will cloud your judgment and blind you to the potential of other potentially better options and opportunities.

Sometimes you have to know when to quit when you’re ahead and plenty of people are aware of this. However, far fewer people understand that sometimes you need to quit while behind, realizing you’re unable to catch up. You may of course be tempted to think that “Winners never quit, and quitters never win!” But there are very few winners in comparison to players, and just because you aren’t winning at some particular thing doesn’t mean your energy isn’t better spent in a more profitable manner, perhaps running a more suitable race.

Good leaders understand that just because a battle is lost does not mean the war is over. You pick yourself up, dust yourself off, regroup, resupply, and attack from a different angle and in a different manner. You do however, use all of the knowledge you gained from your loss to help further your chances for success in the future. The golden lining to the Sunk Costs Fallacy is that many times everything is not entirely lost. There is a great deal of experience and knowledge to be gained from failure. Knowledge is the most powerful thing in business, in all forms. But that knowledge has to be accurate and appreciated. The inherent issue with believing a Sunk Cost Fallacy is that you’re not cutting your losses, and rather you’re still investing in them. Worse still is you’ve yet to learn anything and are continuing to make not only another mistake, but repeat the same one you know exists. It’s a classic case of a Catch-22. The more you invest to try and undue or correct the error, the greater the problem becomes, thus forcing you to invest even more to compensate. It’s an extremely vicious cycle and made all the worse if you’re unaware that it’s even occurring.

The trick to recognizing when a Sunk Cost Fallacy is influencing you is fortunately rather easy. It all starts with your thought patterns and the internal (or external) conversations that are arising. If the thoughts and discussions you have revolve around anything that sounds desperate, grasping at straws, as though it’s a last stand, playing catch-up,  be very, very careful. Statements such as: “Well we’ve done it this way for so long…”, “It’ll turn around when…”, “We’ve invested so much already…”, “This needs to show results…”, “We anticipate that…”, “Our forecasters believe…”, ” We hope that..”, “It’ll probably get better…”, “If only..”, and on and on and on. Remember that excuses are abound for failure, possible solutions are also as widely available though few with any real value behind them. Phrasing is important here, and can be very tricky to spot. Unless you know with 100%  certainty why something failed in your business dealings, be cautious when deciding on a solution moving forward. You’d hate to “Double-Down” on a lemon.

One of the hardest factors to overcome when dealing with the Sunk Cost Fallacy in business is going to be the ego.  We not only want to avoid being wasteful, but more importantly we never want to appear, or even believe, that we’ve failed. Failure is embarrassing, especially when we so desperately want to succeed and to have done a good job for those around us. What we have to do is retrain ourselves to believe that recognizing failure and cutting losses is an actual victory (of sorts). An even greater victory is realizing and admitting to your own mistakes. Now that sounds like sunshine and daisies for an individual and their personal growth, but when you have to report on your failures to upper management or a client, it’s an entirely different problem. Your job or the contract is on the line. But this is even a more critical moment to not think that “Doubling-Down” is going to be the best solution. You are supposed to be doing right by your employer and those you perform services for or provide products to. Being honest, upfront, and frank about your findings in all your business dealings shows backbone, integrity, and honesty. People typically appreciate that, and especially if you’re able to make it known that there was always a chance for failure, and this time, it just happened to occur. Nothing is 100% certain online. Success is never guaranteed. You can plan diligently, consider every possible scenario, cross all your t’s, and dot all your i’s… but that doesn’t mean success is assured. That’s a difficult fact to accept, but the sooner you do, the sooner you will notice when a Sunk Cost Fallacy may be affecting your judgment.

Now it should be noted that the Sunk Cost Fallacy is not necessarily in play when something has not been finalized, or has not gone on until what could be considered completion. Don’t attempt to justify some action based upon investments that are unable to be recovered. Regardless of the amount-to-date invested.  The only thing that matters for rational and logical decision making is your assessment of future costs and benefits. Let no other factors get in the way of your ability to think clearly. Be aware of your ego. Understand that plans can go awry. Anticipate failure making an appearance and prepare yourself for that encounter. Don’t let feelings of loss cloud your judgment and you will be certain to make the best decision moving forward. In the end, all you need to know about the Sunk Cost Fallacy can be summed up by its 3 P’s. The Sunk Cost Fallacy is pervasive, persuasive, and persistent. Of all the Logical Business Fallacies that occur, this one is by far one of the most common we have to deal with on a daily basis. You’ve been warned.