Have you heard of the sunk cost fallacy? It’s basically when we invest a lot of money (or time or effort or resources) on something so we convince ourselves that it’s worked or working even though the evidence clearly disagrees.
An easy example would be if you buy shares in a company and the share price slowly plummets without any hope of recovery but you leave your money invested in it, losing what you have left instead of cutting your losses and getting paid out less than you started with. Another simple example would be that you buy a supplement and tell yourself it’s working because you’d hate to admit you’d just spent money on something that was no better than snake oil.
In business, I see it all the time — business owners who have a hard time knowing when to cut their losses because they’re thinking emotionally. It’s when I ask about the numbers of a certain project or division or store and they’ll resignedly respond, “Yes, that’s not performing as well as we thought but we’re not ready to quit yet…” or “We’ve spent so much on that that I can’t bring myself to cancel it yet”. Often they’re pet projects that have got out of hand in terms of money and time spent on it so people find it very, very hard to admit defeat and retreat.
Sometimes things need a certain amount of time and turmoil to come to fruition – not much in business is an overnight success — but sometimes you do need to be realistic. This is where you have to really be pragmatic and business-focused, looking at the numbers and evidence vs thinking about the background of the investment.
Think to yourself, “If someone really really smart came in here and looked at this project/division/product/service/store without knowing any of the background, what call would they make based on the numbers or performance of it today?” Often the answer is clear and hard to argue with.
It’s not a sign of weakness to change strategy, to change tactics, to delete products or stores or new innovations if they’re not working. This is a time when we need to check our ego for the greater good of the business…
What in your business is a sunk cost fallacy that you need to finally pull the pin on?
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