The Sunk Cost Fallacy in Business and Marketing
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The Sunk Cost Fallacy in Business and Marketing


the sunk cost fallacy is extremely
interesting basically what it does it refers to how people continue with the
behavior or a project based upon the emotional and financial investment that
they have already made in a nutshell it’s the justification of increased
investment based on the cumulative prior investment despite new evidence
suggesting that the cost beginning immediately of continuing the decision
outweighs the expected benefit one reason for this behavior identified by
psychologist Daniel Kahneman and Amos Tversky is loss aversion this means
people are generally less willing to accept a loss than make a gain and so
have the tendency to avoid losses the sunk cost fallacy comes up most commonly
with respect to large systems of records like marketing automation or enterprise
resource planning systems like si P or Microsoft Dynamics for example now I
know that this may not be the perfect representation of the sunk cost fallacy
since description based pricing means there are future outlays expected but in
the SAS world this is one of the closest variations now what’s common though is
that these are usually significant purchases not only in terms of money
both upfront and ongoing but also in terms of people and process usually the
whole sales cycle involve many sales marketing finance and HR people not to
mention the IT organizations that are involved in the purchase operation and
integration of those systems this means that people who have incurred some cost
also tends to overestimate the probability that a project will be
successful compared to those who have not been subjected to a sunk cost
fallacy may be the result of a combination of factors for example a
bias caused by an ongoing commitment or the status quo bias or cognitive
dissonance or plausibility deniability regret avoidance there’s a bunch of
factors when all these biases does is that they make people less willing to
accept failure and halt their behavior so the reason
why the sunk cost fallacy is a problem is because it puts blinders on people
obsessed with some cost we are pretty much unable to make rational
calculations about what action will result in the most benefit there are a
couple of ways to prevent us from falling victim to the lure of chasing
after some costs first thing that you need to think about is opportunity costs
what are you giving up in order to chase those sunk costs so picture this from
the other side from the vendor side of things you picture a company that spent
millions of dollars developing a product and the early market feedback is
negative instead of further investment and continue to push the product what
about taking those resources and putting it towards another project that has a
higher return and the second way to combat this is to avoid committing to a
specific outcome so the insidious thing about the sounds cost fallacy is that
there’s a hidden social aspect to it right it’s bad enough that we feel it in
a drive to try to recover some call that’s one thing but it’s made worse
when you’re part of a team and you feel that people are watching and judging
because you’re publicly committed to a specific outcome but this one is really
easy because hey the world is way too random for us to be able to declare
victory a hundred percent of the time so if you’re going to publicly commit to an
outcome then you better have a mastery over the inputs to that outcome people
who work in marketing they are very prone to the fallacy because they
monitor and optimize campaigns using vanity metrics which show really no
correlation with the business’s bottom line more often than not there’s really
no correlation between these metrics and real world business impact yet many
marketers continue to spend time and money reporting on this metrics because
they have invested so much effort into such reporting I don’t get me wrong this
isn’t an easy problem to solve whether it is internally or externally and with the
fact that there’s ongoing spending in any company the problem may persist but
people get past it all the time the whole point here is if
you’re going to flirt with the sunk cost fallacy do it intentionally with your
eyes open make it a conscious choice not blindly
like everyone else you you

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