How the Sunk Cost Fallacy Can Sink You

Hey, change is hard! Why do people stick around in jobs they hate, relationships they know are poison and cars they can’t afford?

In business a great example of this is the “sunk cost fallacy”.  Sunk costs are the money we have spent on a company, project or even fun event (think vacation deposits) that can’t be recovered, the check has cleared.  However, there are times when following that path (company initiative, new branch, etc.) is proven to be a mistake and we just can’t quit it.  (insert your bad relationship story here).

Hopefully before embarking on a new initiative you have done the research, weighted the pros and cons and created a budget/plan for success.  Let’s say you are planning to open a coffee shop downtown.  After a couple of months, a Starbucks leases the space across the street- a formidable competitor with good products, brand awareness and big marketing budgets.  The store opens and your nice little shop loses traffic and turns to a negative profit.  What do you do?  Try to outsmart/outspend Starbucks?  How much more money do you want to spend and how will you get the return on that money?

Most entrepreneurs have a healthy ego.  “I can’t be a failure”.  But failing to change is a sure path to failure when the facts have proven that the current model is not working.

Sears is a good example.  The business model has changed, but Sears is locked into leases and an established business model.  Sears simply can’t just evolve to a completely different model.  Sure enough bankruptcy has been declared.  The future is clear, but sad.  Simply stated, don’t buy Sears stock unless you need some cheap wall paper.  Fortunes have been lost by someone who thinks they can change customer’s behavior without having a competent, realistic strategic plan to achieve success.

In poker you’ve got to “know when to hold ‘em, know when to fold ‘em”.  Analyze the current situation to see if you can find a way out, quickly.  If you can pivot to a winning strategy promptly, do it!

You must be brave to be a successful business owner, but you can’t be stubborn and win.  The customer will solely determine your success.  Even the best generals learned the value of “strategic retreat” to gain an ultimate victory later.

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