Knowing when to quit to offset your “sunk cost”
Updated: Aug 9, 2021
Have you ever had this kind of experience! You are on diet while you already bought several coupon tickets for a junk food restaurant. You know that it is not rational to have unhealthy food but you still risk getting gaining weight by going to the restaurant. Or when writing an article, although you know that your article is not around the right topic, you still stick on that rather than writing a new one. All of these are known as sunk cost fallacy or escalation of commitment.
So what is the sunk cost fallacy or escalation of commitment? It happens when you initially invested money or time in an endeavor, and you realize that it is not a wise decision and it is rational to give it up. Instead of rethinking it, you stick to the gun and invest more to see your expected outcome, because you don’t want to give up on your previous effort and want to prove that you are right.
This phenomenon is not only happens in our daily life’s simple decision making, but also applies in business decisions. For instance, in 1956, French and British governments and their engineers participated in a project, which was committed to build a supersonic airplane, the Concorde. Before the project was finished, the financial estimation had clearly shown that despite the increasing costs, the gains on this project would not offset its investment and other costs in the long term. The implementation was still in process because neither governments nor engineers wanted to give up on this unfinished masterpiece which they dedicated lots of time and huge financial investments. The outcome was not unexpected, that Concorde brought billions of losses and itself operated only for less than 30 years.
We can see that this escalation can waste a lot of money and time for an organization or government. Especially in the business world, this fallacy is more associated with decision makers, as they are the person who decides whether to allocate further resources to the current bad choice, or to rethink and adjust the strategy and the final decision. We know that decision makers are also human beings, while every human being is not rational to make the right decision all the time.
So how can we avoid irrational escalation of commitment? Rethinking is vital for us to avoid this fallacy and keep moving forward. In this rapidly changing world, rethinking allows you to reflect and reevaluate the decision based on your own experience. It also helps you become more mindful to listen to your inner selves assessing your own values and objectives. Otherwise, you will be like the frog in the lukewarm water, where you will not survive ultimately because of the slow-boiling spots. The wisdom from rethinking is to know when to give up your sunk cost and when to climb a new peak. A study from Harvard Business Review shows that “experience or stocks of knowledge (so called “crystallized intelligence”), rather than raw computational power (“fluid intelligence”), enable one to avoid falling prey to the effect” (Ronayne).
I believe that many people believe in “Never give up”. “Never give up” is not subjected to keeping doing things whose cost outweighs its benefits. It means staying open and adjusting your strategy to forge the right path.