Understanding Sunk Cost Fallacy

You’ve made 2 deposits on ski trips.

Which do you go on?

54% chose the worse option, but why?

Let’s talk about Sunk Cost Fallacy: pic.twitter.com/IiPnDaAjWa

— Kurtis Hanni (@KurtisHanni) April 15, 2023

Seeing that survey blew my mind.

Who chooses the worst trip?

But we all make these decisions daily.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

We go to an event we’re dreading because we paid for the tickets.

We keep a bad employee on staff because we’ve already trained them.

We pay for new software (or stick with an old one) and keep trying to make it work for way too long.

But, why?

— Kurtis Hanni (@KurtisHanni) April 15, 2023

Sunk cost fallacy is when we fail to abandon a bad option because we’ve already spent the money.

We:

• get to emotionally invested
• overvalue our commitments
• prefer avoiding losses over seeking gains

— Kurtis Hanni (@KurtisHanni) April 15, 2023

So, how do we avoid wasting our time and money on already doomed projects or investments in our business?

Here are 5 ways to acknowledge sunk cost:

• Analyze the cost
• Include a skeptic
• Reevaluate as you go
• Actively look for mistakes
• Acknowledge your feelings pic.twitter.com/ab4GAKDiZm

— Kurtis Hanni (@KurtisHanni) April 15, 2023

• Analyze the cost

1. Write down all the scenarios
2. Record all future costs for each
3. Create a trending cost analysis for each
4. IGNORE ALL PREVIOUS COSTS

Yes, it’s in ALL CAPS on purpose.

If you include prior costs, you’re falling prey to sunk cost bias.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

• Include a skeptic

These people provide insight that is unnatural to everyone else.

Invite them to the team, buy their meals, and ask for their feedback.

They’ll improve the decision quality because they’ll force you to THINK.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

• Reevaluate as you go

Before you start, it’s important to plan:

- when you’ll reevaluate
- conditions that will cause you to pause

By doing this, you avoid the decision fog that happens during an engagement.

Slow down, do the analysis, and get back to work.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

• Actively look for mistakes

Our natural instinct is to disregard what conflicts with our belief and "keep" what agrees (also known as confirmation bias).

So, we have to actively counteract this tendency.

Ask yourself: what data could make me wrong? and then dig into it.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

• Acknowledge your feelings

Feelings are a part of life, quit ignoring them.

They happen whether invited to the party or not.

By acknowledging and labeling them, we’re able to decouple our decisions from our feelings more easily.

— Kurtis Hanni (@KurtisHanni) April 15, 2023

We can never truly eliminate all of our biases.

But this analysis will improve our decision quality.

I wrote more in-depth about this in my newsletter a while back.

Join 16k+ subscribers while you're there:https://t.co/tslgcIi1j4

— Kurtis Hanni (@KurtisHanni) April 15, 2023

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— Kurtis Hanni (@KurtisHanni) April 15, 2023