How to Stay Out of the “Sunk Cost Bias” Trap

Life presents us with one decision after another, every hour, every day.

Some decisions are simple, others are tough.

Often, we don’t have all the information to make a well-informed decision, but we need to move forward.

Yet information is only one aspect of making a decision.

Other factors impacting the decision-making process are our emotions and the cognitive biases we bring to the table.

What is a Cognitive Bias?

Out of all the definitions, here is the one I find helpful.

It describes cognitive bias as a way of thinking and interpreting the world around us that may not always reflect reality.

The bottom line…

While we think we have an open mind and can be objective, we all bring our conditioning and past experiences to new situations… that is the lens through which we evaluate and judge.

It’s important to understand that there’s not just one cognitive bias that affects our thinking, but several.

So before I get to today’s topic of the “Sunk Cost Trap/Bias,” let me briefly explain some of the other biases, including:

• Confirmation Bias: We tend to interpret information in a way that confirms our beliefs and values.
• Hindsight Bias: It’s the tendency to view past events as more predictable than they were.
• Overconfidence Bias: It’s the confidence in our judgment to be more accurate than it is. 
• Anchoring Bias: It’s the tendency to rely too much on the first piece of information we receive (think first impressions…)
• Status Quo Bias: We tend to follow the status quo rather than change things.  

Cognitive Bias is Normal

As much as you and I may not like it, some cognitive bias is normal and is to be expected. We all exhibit some bias from time to time.

And while biases are easy to spot in others, sometimes detecting them in ourselves is challenging.

But they’re there!

And it’s important to realize that they affect our thinking and decision-making across all areas of our lives, including our interactions with others.

The Sunk Cost Bias

So now, let’s talk about the sunk cost bias and why it’s essential to recognize it in your business.

But first, what is it…

The sunk cost bias refers to costs that have been incurred and cannot be reversed. These costs may be measured in time, money, emotional commitment, or anything else.

Sunk cost bias is our tendency to stay committed to a decision even though it’s not working for us. Hence it turns into a trap.

Instead of abandoning a course of action, we stick with it because we’ve invested significant time, money, or other resources.

And often, we may continue to invest resources even though it doesn’t make sense anymore.

Understandable? Yes…. Good idea? Probably not.

Some Examples

So let me give you some examples of the sunk cost bias/trap in your business.

Employees:

Picture one of your employees. You thought she was perfect for the job, so you hired her.

But now, after five months of patiently waiting for her to get to work on time and do the job she was hired, you wonder if you made a good decision.

She had plenty of opportunities to get her act together and get up to speed. You even paid to send her to classes to get trained.

But she is well-liked by patients and staff. And since she’s already been here for five months, you’re hesitant to let her go.

Perhaps you should give her one more chance. You could send her to another class, and she could shadow a staff member to get better at her job.

Anything but terminate her employment because you are trapped by sunk cost bias. You’re trying to make it work since you’ve invested time, money, and emotion in this relationship.

But it may be better to let her go and find someone who would be a better fit for your office.

Equipment:

Ten months ago, you added another service to your practice. You had to buy equipment and spend a good amount of money to create another profit center in your practice.

But things are not going according to plan. There is little interest in the service, and you wonder if you should continue.

But here you are… you spent a lot of money and time to get this off the ground. You’d hate to give up and walk away from it.

And what would you do with the equipment anyway?

While you might be able to sell it and offer a service that might be a better fit for your patient population, you’re not ready to give up.

Because if you quit now, you’d be guaranteed to lose out and not get any of your investment back. So why not keep trying a little longer and see if you can make it work?

Billing:

You did your homework before hiring them, and they checked out fine.

You signed a year-long contract and paid the non-refundable sum of $2000 in the event you would terminate the agreement before the end of the year.

And now, four months into the agreement, the billing company hasn’t done much billing, and you have received few reimbursements.

But you can’t afford to wait much longer. So what should you do (aside from seeking legal action)? Do your own billing or hire another company?

Of course, if you break the contract, you’d be giving up the $2000 you paid, even though it’s their fault.

And that’s when you decide to give them more time, even though walking away might be your better choice.

Be Aware

Awareness of the sunk cost bias is critical because often, we include sunk costs in our decision-making when we should not.

Sunk costs represent past expenses or investments that cannot be recovered, regardless of future events.

Recognizing the tendency to bring sunk costs into the decision-making process helps us avoid the trap of sunk-cost thinking. It also allows us to decide on projects’ expected outcomes and returns alone.

What’s been your experience with the sunk cost bias? Once you have the awareness, they’re easy to see…

Share your experience and leave your comment below…