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The sunk cost fallacy is in action every time you:

  • Sit through a long boring movie even if you decided after the first half an hour that is was terrible
  • Finish a meal that tastes bad and after you’re already full
  • Continue a bad relationship or friendship, purely because of the time and energy you’ve invested in it so far

Put simply, it’s the motivation to continue on a bad course of action, where logically the future does not look bright, only because of the time/money/energy you’ve put into it up to that point.

These already spent costs, that cannot be recovered, are known as “sunk costs”, and there is a strong human resistance to giving them up. It feels like admitting failure. But being able to be agile and “pivot” when needed is the mark of an intelligent business, and the sunk cost fallacy is generally the main thing in the way of that.

A pivot is when, part way through developing a product or service, you decide to take it in a different direction than the current planned path. This might mean changing the main focus of the offering, or even making it do something completely different to the original plan, and should be informed by early feedback as much as possible.

The problem with the sunk cost fallacy is that you end up investing much more than necessary in to whatever you’ve sunk the costs into, leaving you with fewer resources to go down productive paths. For example, if you’re stuck in a bad relationship, you can’t open yourself up to a future good relationship. And if you’re constantly paying for ongoing product development on a dead product, you can’t be working on a useful product instead.

All you’re doing in this case is throwing good money after bad… but there’s a silver lining. What you’ve paid for up to this point isn’t all wasted. The validated learnings you have gained will stop you from repeating the same mistakes. You have tested the market, an idea, or a product line, and you’re better positioned for your next endeavour.

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