Each decision maker knows this situation: a former decision turns out to be the wrong choice – it becomes more and more questionable whether the chosen track will lead to the desired results. At a certain point it is pretty clear: the decision – the always difficult weighing up between different valid options – was wrong.
No problem, one could think, since we live in a VUCA world: volatility, uncertainty, complexity and ambiguity have become our constant companions. Hence, entrepreneurial decisions have certainly become more difficult compared to one or two decades ago. So, let´s revise or adapt the decision on the basis of recent learnings. That is the theory.
In practice, we nevertheless can still observe an enormous reluctancy to course correct decisions. This pattern shows up in statements like: “We cannot take the product off the market, because we have recently invested a seven-digit amount in its development. Not talking about the massive and expensive marketing costs!” Or: “We will never withdraw from Bulgaria since we have invested a fortune in establishing our business there!”
What is happening here? We stick to our original decision since we would have to acknowledge that the invested money is lost. We might also fear to lose our face. In addition, in too many companies, decision makers are under heavy short-term pressure to deliver results. As a result, we throw even more money at projects that are already dead.
We call this phenomenon sunk cost fallacy.
The higher the investment amount the more likely it is that we continue. Let´s have a look at a real company example which illustrates that the sunk cost fallacy can indeed lead to disastrous decisions.
Not possible in your organization? We would be cautious. In a VUCA world, the sunk cost fallacy makes a remarkable career.