Sunk cost fallacy
Today’s story is a light weight one about how we are not rational decision makers during the best of times are completely irrational during the worst of times.
We see this play out almost all companies and lives through the ‘Sunk cost fallacy’. Simply put, just because you spent ‘X’ hours of your life doing an activity or ‘Y’ rupees of money purchasing an item, it does not mean you have to keep doing the same thing or guilted into using your purchased item.
We, at Hypto, have also fallen prey to this way of thinking on occasion. However, that has helped us recognize this type of thinking right at the start of any decision tree now and we are able to make a conscious choice accordingly.
Sunk cost fallacy is completely illogical — most people would have seen the below image or some representation of the below image which tries to say you should keep trying no matter what.
But what most people seem to take away from it is that we have spent so much time doing this work and we have not reaped any returns from it. So, the world owes us something and let us keep doing the same thing again and again because what is owed to us will be paid to us.
Well, when I say it out loud and put it so bluntly as above, it seems like an obvious thing to not follow such an approach. The sunk cost fallacy acts at a much more sub-conscious level and the biggest challenge with it is that people don’t even recognize they are being held back by this irrational decision making that happens in their mind without conscious thought.
If we know with high probability that we are a certain distance away from our target, then by all means keep digging. But the real world rarely happens that way. Time is always forward looking and we cannot be taking probabilistic decisions based on certain actions that we had taken in the past.
Let me give an example of this fallacy — we spoke to one potential hire recently who said he was excited about what we were building. He was extremely kicked to join us and we also made an offer. However, he ended up saying that if he resigned at that point, he would lose out on some potential ESOPs that would vest in another 3 months time. So, he said that he will definitely think hard about it and should be able to take decision after 3 months. Now, this is exactly the sunk cost fallacy playing out in his mind — he has put in the hard time at his previous company for 9 months and is saying that its just another 3 more months to get his reward (his company had a yearly vesting schedule).
So, in this case, this candidate fell prey to the fallacy without even being consciously aware that he was doing so. He was very much excited to join us and truly believed that Hypto would grow more than 100x from where we are today. But that was inherently conflicting with his decision that he was making about staying for another 3 months. The biggest ROI he could ever get was on his time — and considering our ESOPs were more than generous and had much more compounding potential (which he himself said so), it just made all the more sense to get in much earlier and let the compounding begin sooner. But, he was thinking along the lines of the 75% of time he had put in that year and with only 25% remaining, he wanted to get the reward he felt he was owed. (Well, also a short PS: if that company had given him monthly vesting, he would not have had to make this decision since his ESOPs would have vested as per the time spent and not have delayed gratification. Hypto offers monthly vesting of ESOPs after a 1 year cliff — will break it down in another story).
So, we just wanted you to be aware of this fallacy playing out in your mind and not be held hostage to it. Hence, this story today.
I am also not confusing this with perseverance and grit. That is a way of life, not a decision making framework that happens consciously/sub-consciously. We value grit extremely highly at Hypto (along with Empathize extremely). But we will never be held hostage to emotions of guilt or wastefulness while making a forward looking decision.
Always be optimistic and let’s 🚀
