2 Techniques to Mitigate the Sunk Cost Effect in Your Business

Good Strategy Comes With Tradeoffs

If you’ve been in business long enough, you’ve undoubtedly made a few mistakes. That new product or service may have seemed like a great idea, but the returns never materialized and eventually you had to decide whether to pour good money after bad or cut bait and run. Or you thought you made the perfect hire, but things weren’t working out, forcing you to decide whether to invest more time and energy into the relationship or to move on.

Making decisions like these can be difficult, not only because they require judgment, but because you’re fighting the sunk cost effect  (or the Concorde effect), which is the psychological tendency to maintain the status quo once you’ve devoted time, energy, or money to an endeavor. It’s known as the Concorde effect because a classic example was the willingness of the French and British governments to continue supporting the Concorde airline program even when the prospects for the Concorde were clearly dismal. In hindsight, the effects of this bias are almost always obvious, but the psychological tendency can be incredibly difficult to fight in the moment.

To mitigate the sunk cost effect, consider employing the following two techniques:

  1. Focus on the future, not the past. The only factors that matter are those associated with future costs or benefits, not the resources expended in the past. In many instances, the outlook is clear when you swallow your pride. If you’re having a hard time doing that, then try to ask yourself how much more painful it could be if you stay the course and fail.
  2. Involve a devil’s advocate. Nobody likes the bigmouth who’s always trying to disrupt the status quo, but they can be incredibly valuable when dealing with difficult decisions like these. Find someone who doesn’t have an emotional attachment to the status quo and push them to give honest, objective feedback. And most importantly, listen.

Employing these techniques won’t necessarily guarantee success, but it will help increase the quality of your decision-making process, as well as reduce the risk that they rename the Concorde effect after your business.

Christopher F Meshginpoosh CPAChristopher F. Meshginpoosh is managing director of Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.   

 

 

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