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…