I’ve invested time and money. Rebranding strategy For e-commerce businesses, online store sales are still declining. If you decide to continue with your rebranding strategy because of how much effort you put into it despite evidence that it’s not delivering results, you’re falling into a psychological trap called the sunk cost fallacy. It will be.
Learn more about some of the psychological factors that influence the sunk cost fallacy and strategies to avoid making this mistake in your own decisions.
What is the Sunk Cost Fallacy?
The sunk cost fallacy is a phenomenon in which individuals or groups are unwilling to abandon adverse actions due to past investments. “Sunk costs” refers to past investments of time, energy, and money, and refers to any resources that cannot be recovered in the future.
The sunk cost fallacy occurs when a person decides to continue an action because of past costs even though the current and future costs exceed the potential benefits. The sunk cost fallacy negatively affects rational decision-making in the human decision-making process, affecting everything from economic behavior to organizational behavior. The sunk cost fallacy can even affect small everyday decisions, like quitting watching a boring movie because of the amount of time you’ve already spent watching it.
Examples of sunk costs
Here are some examples of sunk cost fallacies.
financial investment
Projects or decisions that require a larger initial investment can lead to the sunk cost fallacy. For example, if a marketing manager makes a large initial investment: Paid advertising campaigns You’re more likely to stick with the campaign even if the results fall short of expectations. This phenomenon is related to the common phrase “putting good money after bad”. This means that the sunk cost fallacy can cause people to spend more money on inferior investments in the hope that the results will improve.
project
The sunk cost effect also applies to the amount of time, effort, and emotional energy that is invested in a project. For example, a seller who invests heavily in developing a new product may Production line Customers are more likely to continue investing in the project despite negative feedback. Decision makers overseeing new projects need to track current costs and benefits without letting past decisions about project priorities influence future decisions.
overhead costs
Another area of sunk costs that can impact business decisions is overhead costs Utilities, insurance, office supplies, etc. Even if you invest money and effort into business overheads, you will never be able to recover these expenses. Business owners should regularly consider whether their overhead costs are actually benefiting the business. For example, if a seller accidentally Real store Retail stores remain open even when sales are not high enough to justify rents.
Psychological factors behind the sunk cost fallacy
When identifying the sunk cost fallacy in decision making, it is important to understand some of the psychological factors that contribute to it.
commitment bias
Commitment bias, also known as escalation of commitment, is a pattern of behavior defined by a person’s or organization’s tendency to favor doing what they have previously done or said they would do. For example, someone who has been in sales for several years may feel personally responsible for sticking with that job rather than choosing a more rewarding career path.
This bias can be even stronger when commitments are made publicly. For example, suppose a business owner is announcing a new venture. customer relationship management system You may want to keep that system in place, even if it’s not appropriate, to make your sales and customer service teams more productive.
loss aversion
Loss aversion is an emotional bias that seeks to minimize losses rather than maximize gains. Humans tend to place more value on the negative feelings of losing something than the positive feelings of gaining something of equal or greater value.
Loss aversion reduces sunk costs by focusing on how to minimize losses from previous commitments, rather than valuing opportunity costs, or value, gains, or gains that could not have been obtained from other options. contributes to the fallacy of. For example, rather than selling a stock that has declined in value at a loss, an investor may hold onto a stock in the hope that the value will recover, and use that money to invest in other stocks with better prospects for future growth. can.
framing effect
In this cognitive bias, a positive or negative framing of a situation drives decision making. This bias occurs when a negative frame is placed on the idea of abandoning a previous investment or course of action that is less profitable. A more rational perspective would be to negatively frame how unprofitable that investment or action is and therefore how positive it would be to get rid of it. The framing effect creates a narrative that distracts from the actual data about the future costs and benefits of a particular course of action.
How can you avoid the sunk cost fallacy?
Here are some ways to avoid falling into the sunk cost fallacy in your decision making.
Set clear goals
write out actionable goals Because of the consequences of a new course of action. Establishing clear guidelines for what success or failure looks like for a particular plan gives you something concrete to refer to when making rational choices about whether to continue with that plan.
If decision makers lose sight of what success looks like for a project, irrational decisions can occur. Use the goal setting tool Software, applications, physical resources, and more to help you set goals and measure results. SMART goal system Resist the sunk cost fallacy by setting goals that are specific, measurable, achievable, relevant, and time-bound.
Data prioritization
One of the best ways to make rational decisions is to rely on data to accurately analyze costs and benefits. For example, e-commerce sellers can use: Shopify reporting and analysis tools To determine if the marketing strategies you have invested in are not generating enough sales conversions. make sure you have a good one data management system With it in place, it will give you the information you need to avoid the sunk cost fallacy.
set Key performance indicators (KPIs) To evaluate how well certain campaigns, strategies and plans are working for your business. For example, you can evaluate the click-through rate (CTR) your store gets from your site. email marketing campaign Justify continuing with it. Use as much relevant data as possible when deciding whether or not to take a course of action that you’ve invested in.
stay diligent
Self-awareness helps you avoid the sunk cost fallacy. Ask yourself if past decisions were worth their current costs and benefits. Develop a rational decision-making process based on data, and set regular checkpoints to reevaluate. Don’t be afraid to cut your losses if you conclude that the current costs outweigh the future benefits. Find the courage to pull out of previous investments without getting emotional or feeling guilty. Actively check yourself to make sure you are avoiding cognitive or emotional biases such as loss aversion or commitment bias. Evaluate your current alternatives to every course of action, and switch to a better one if one exists.
Frequently asked questions about sunk cost fallacy
What is an example of the sunk cost fallacy?
A famous real-life example of the sunk cost fallacy is a supersonic aircraft called the Concorde. The aircraft was funded by British and French governments for decades in the late 20th century, despite clear signs that the project’s sunk costs exceeded its potential benefits.
Why is it called the sunk cost fallacy?
The term “sunk cost fallacy” refers to costs (resources such as time, money, energy, etc.) that are permanently spent or lost. “Fallacy” in this context refers to the mistaken belief that continuing the wrong action will lead to better future outcomes, justifying the sunk costs.
How can you escape the sunk cost fallacy?
Ways to avoid the sunk cost fallacy include setting clear goals, prioritizing data to make informed decisions, and identifying individual or group cognitive and emotional biases. This includes working hard on.
