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Avoid the sunk-cost fallacy

45610390_MWhether it’s personal or professional, we’ve all been there. We’ve stuck by a failing relationship or project just because we’ve put in a significant amount of time, money or other resources into it, only to watch it crumble later before our eyes. We may recognize signs of failure, but can’t get past our bias. It would be foolish to walk away at this juncture, right?

Enter the sunk-cost fallacy. Sunk cost fallacy is the belief that anything you’ve already invested in deserves greater investment—even if it was a poor investment in the first place, and even if the investment is unlikely to lead to the desired outcome. But how do we avoid falling into this trap in the first place?

Following are a few helpful ways to nip this tendency in the bud before it’s too late:

  • Acknowledge a sunk cost when you see one — and learn from it. Sometimes we have to cut our losses. No matter what choice you make today, you can’t change the past and recover lost money. So, ask yourself: how can I avoid this mistake in the future?
  • Keep in mind that “I’ve already invested so much into this” is not fruitful thinking because you will continue to hemorrhage money.
  • Separate ego from business decisions. People notice and care less than you think. And at the end of the day, your business will benefit from sound financial decisions, not emotionally charged ones.
  • Involve multiple stakeholders in the decision-making process, so that the person who made the initial decision to invest is not the only person involved with matters of the future.
  • Know your why—and revisit it often. Are you achieving the goal you set for your company—or are you just too emotionally invested to walk away?

When we learn to remove our bias from financial decisions, we can truly move forward. You can also turn to our experienced team to help you look at the situation objectively. Give us a call before you throw away good money at the expense of the bad: (310) 613-1933

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