Behavioural Bytes Archives
Which seems logical: Cut your losses or sink deeper into the money pit? Yes, it’s a trick question, as the brain’s default setting tends to the irrational.
This week we delve into episode 2 of Irrational. Prof Mercer’s latest case has a puzzling twist - a CEO sinks millions (you read that right) into a failing project rather than cut his losses. It explores a powerful behavioural bias known as the sunk cost fallacy (SCF). It’s the tendency to continue sinking time, money or effort into a project because we have already invested in it – regardless of its current viability (South African Airways).
It is explained through two key concepts:
Loss aversion
We’re wired to feel losses more strongly than gains, i.e. the pain of giving up a failing project feels worse to the CEO than the potential benefits of ending it. Closer to home: it feels ‘less than lekker’ when the lights go out during loadshedding than the happiness when they come on again (nudge nudge Eskom).
Regret aversion
We’re wired to avoid regret. Throwing good money after bad might seem irrational, but it can be a way to avoid the emotional sting of admitting a mistake. Closer to home: Eish! (Johannesburg Water).
We often stay in unhealthy relationships because of the time and energy already invested (even if it's making us unhappy).
It can have ramifications in the business world:
Continuing with a failing campaign
Just because a campaign has been running for months doesn't mean it's effective. Let numbers speak for themselves – businesses need to objectively analyse results and be willing to pivot strategies if necessary.
Holding onto unproductive employees
Sometimes even after extensive training or investment an employee might not be the right fit. Recognising this and letting go can be crucial for your team's success.
It influences our everyday choices as well:
Staying in a bad relationship
We often stay in unhealthy relationships because of the time and energy already invested (even if it's making us unhappy).
Finishing a movie we hate
We might force ourselves to finish a movie we dislike simply because we've already watched half of it (Yes, you).
Some tips to overcome this bias:
Focus on future value
‘Does the project still hold value for the future?’ - don't let past investments cloud your judgement.
Embrace the opportunity to learn
View abandoned projects as learning experiences so that the knowledge gained can inform future decisions.
Set clear exit points
Establish pre-determined metrics for success or failure.
Reaching these points should trigger an objective evaluation and willingness to course
correct.
Fundi Fact:
By understanding the SCF and its psychological mechanisms we can make more rational decisions in both business and personal life.
