Has Your Business Fallen for the Sunk Cost Fallacy?

When you feel invested in something, you’re far more likely to follow it through, even if it’s no longer in your best interest. This is the heart of the Sunk Cost Fallacy, and it’s an assumption that can have big repercussions to your business, either in wasted time, wasted money, or both. In today’s blog post, we’ll explore the Sunk Cost Fallacy, and how you can prevent your business from falling for it.

What is the Sunk Cost Fallacy?

A sunk cost is essentially any expenditure that your business makes which cannot be recovered. However, the Sunk Cost Fallacy suggests that despite the fact that the money has already been spent, it will still be considered when making future spending decisions. For example, let’s imagine that your business spent a considerable sum on a new computer system last year. But this year a new system is available which is 10 times faster but costs the same or even more. A logical decision-maker would consider only the new cost vs. the projected benefits, but the Sunk Cost Fallacy could potentially cause a business owner to turn down this deal, in spite of the fact that it could improve efficiency and save even more money in the long run. 

So…how can your business avoid it?

The golden rule when it comes to business expenditure is to always disregard sunk costs, no matter how recent the purchase was made. Only by doing this will you be able to make a truly measured decision. If you start to allow the price of something you purchased a few years back come into play in today’s decision-making, you’re sure to make some bad calls. It’s easy to see why people fall for the Sunk Cost Fallacy; after all, when you made the purchase, you were 100% convinced it was the right thing to do (which at the time was probably true). But this conviction can lead you to make an emotional decision rather than a detached, logical one – and it could be to the detriment of the business.

The fear of loss

No business wants to throw money away; that should go without saying. However, if an opportunity is presented to you that will improve your business in a big way, you should consider it carefully. Whether this is a financial benefit, an efficiency benefit, or anything else, doesn’t matter too much – you have to logically weigh up the pros and cons. If you fall into the Sunk Cost Fallacy, you’ll start bringing in factors that have no place being there. It all stems from a fear of losing money, and the admittance of making seemingly poor decisions in the past. But in reality, none of us are mind readers; so don’t be too hard on yourself. One final question: If you spent £10,000 last year on a system which can this year be replaced for another £10,000 but will also lead to a reduction of 25% in overall business costs… what would you do?

So now that you’re clued up on avoiding the Sunk Cost Fallacy, how about finding ways to avoid sunk costs in the first place? With the AutoVu CRM & FSM platform, you’ll be able to make smarter spending decisions based on real data about your customers, employees, and more. Check out the site today to learn more.