The Sunk Cost Fallacy

You have heard the phrase “don’t throw good money after bad.” Why do we do it?

When we commit to something that costs significant money and it doesn’t work out most people are unwilling to pull the plug. So, good money continues to go toward a loser. Not long ago a senior executive called me and asked if I knew anyone in the pet cremation business who was making meaningful money. I told him I didn’t know anyone who was making ANY money much less meaningful money including the guy who started it. But I do know a lot of people who have created some really innovative excuses for keeping it going. He responded that he couldn’t find anyone either and that were considering shutting down their efforts. Yet, that effort had gone on for a long time and, for all I know, still is.

 

Screen shot 2012-07-02 at 8.03.03 PMThis sunk costs situation happens much too often in business.  We insist on getting value out of the money we’ve already spent.  We become determined NOT to lose money.  We can’t — we won’t — let go.

However, by not letting go when something isn’t working, we can end up losing a lot more.  We keep pouring money, time and effort into something that has no chance of working or would lead to a poor result at best.  The project or initiative  keeps costing more and more.  Instead of cutting our losses, we compound them by hanging on.  We make our losses worse….More at What Are Sunk Costs? – Small Business Trends

My opinion? I admire people who can admit mistakes and move on. Don’t you? It’s far more embarrassing to keep betting on a loser.