IS THE SUNK COST FALLACY CRIPPLING YOUR COMPANY INNOVATION EFFORTS?

Let’s face it, we all made that mistake: have you ever said to yourself “I have already put too much effort into this, I would not stop until it is done!”. Alternatively,” I have already put too much money into this project, and other payment will fix everything.”

To clarify things, we are not talking about consistency. Be inconsistent with the pursuit of your goal is a good thing or maybe a great thing. In this article, we are discussing the “sunk cost fallacy.” It is a common mistake that people do not realize that they are facing one. We like to think of ourselves as a logical species. The truth is much of what we do every day is either automated or emotion- dictated.

The decisions we make as human beings are in a great part affected from our past experiences. We tend to make shortcuts, so we do not have to think about every decision separately. Unfortunately, the decisions are affected by many aspects (emotions, personal investment, instant gratification, etc.)

So in this article, I want to show you one aspect that can lead you to make the wrong decisions: the sunk cost fallacy.

Have you ever noticed that the more you invest in a project or a person, the harder it is to let it go? This is due to the sunk cost fallacy. Your brain tricks you into thinking that the more energy you put into something, the more valuable it is. After all, you are not dumb if you have chosen to do it then it must be of value. Your ego certainly plays a role in this.

If you are thinking “freemium games” or “software” you get the idea. Investing time and money into a service or a system that you use and feeding up with data makes it more valuable. This is why it is too hard to change your email address for example. However, this is not a problem per se.

The problem manifests itself when you start making decisions that you think are rational but are not: it may clarify this point: You may think that your decisions are based on the true value of the offer (what you are going to get out the investment), in reality, you are weighing in your past investments. So the more you invest in something, the harder it becomes to abandon it.

How does the sunk cost fallacy affect your business?

In economics, sunkcosts are the payments or investments which can never be recovered. Let’s say a company has invested $1 million in three manufacturing facilities. In one of the factories (Factory A) the company faced some problems and had to pay another million dollars to fix them. After three years when crushing the numbers, it’s clear that “factory A” The sunk cost fallacy comes into play: the company has invested more money in this factory then the others. It becomes more and more unlikely that it will let go of it. If a new management takes over the company, the decision would be far easier.

Even government and organizations falls to sunk cost fallacy. Britain and France invested heavy amount in the supersonic passenger aircraft Concorde. Even though both parties, long realized that the supersonic aircraft business would never work, they continued to invest enormous amount of money in it. The project was scrapped only after it became a financial disaster. That’s why psychologist often call sunk cost fallacy Concorde effect. US government extended involvement in Vietnam War because of this. George Bush continued bombing Iraq even on knowing there are no chemicals or nuclear weapons there. Just because they had made investments in it. This extension of Vietnam and Iraq war wiped out billions of dollars for nothing.

Innovation and the sunk cost fallacy?

Now let’s talk about innovation: many companies fail in the game of innovation. This can have many reasons. One of which is not letting go of all technologies and “Industry best practices.” With the motto “We already invested too much money in this technology.” This is dangerous, in this day and age where startups are cool, companies are not just competing against their peers but also against every startup in a garage. Examples for this are endless.

The big challenge is to know if the new technology is just hype or the next big breakthrough. You should be able to consider applications for new technologies in your field. Sometimes we are just too engaged with our day-to-day business that we lose the ability to criticize our product or our industry. In your pursuit of innovation, you should banish the following statements:

  • We tried this before: new technologies can solve old problems that made this fail the first time around.
  • We have done this thousand times and perfected the process: Old methods are sometimes based on very old technology and beliefs. With every new technological advancement, new manufacturing and development practices are popping up every day, development or production department in your company may not be aware of them.
  • This is a good idea but to implement it we should change our manufacturing process: first of all, why not, if you take into account that the implementation of new technologies can take some time and initially investment, the potential gain should be attained in an acceptable amount of time. This should be calculated.
  • … You get the idea

Some Firms or departments are crippled because of a decision maker that is opposing every new sales strategy, every new technology… For the management this is a big dilemma, firing this coworker, can be expensive. However, is it? Is it more expensive than driving the company into the abyss? I know that this is extreme but let’s not forget about Nokia. The company went from the leading mobile phone manufacturer to oblivion just because the decision-makers would not change.

This Article was published first on devvation.com