How to Avoid the Sunk Cost Trap

CeCe and I have signed up with a group of friends for an outdoor excursion that involves riding in all-terrain army vehicles, hiking and some mountain top sightseeing. Unfortunately, it has been raining cats and dogs for three days. We meet for lunch together before heading to the excursion and our conversations turn to the rain.

Looking outside, it is like you are pouring water out of a bucket. I can tell from the tone, no one really wants to go today and this tour is rain or shine. Problem is, we haven’t seen the sun in three days. Jeff checks the forecast and confirms, 80% chance of rain this afternoon, breaking off at 4 p.m. when our tour is scheduled to end. Wow, great timing.

The conversation turns back to, “Let’s just cancel. Why are we all loading up and going when no one wants to go?” Everyone laughs and several comment, “we have no idea.” The debate goes on and just when I think we will get to skip the wet ride, someone says, “Hey, we paid, let’s go. It might turn out to be fun.”

Now, when we step away from this situation, it accurately reflects our bias at times on decisions we have made that are not turning out as we had anticipated. The more we have invested in these decisions, the more determined we are to stay the course. For us, the risk today was simply getting wet and possibly being a little miserable, but for our businesses and clients — the risks are usually much bigger.

Most of us can remember a very costly decision that could have been mitigated had we heeded others’ early warning signs and advice. I call this anchoring “sunk costs.” When we are invested personally and/or financially, we can become close-minded to better options, modifying our decision or simply shutting it down rather than risking even more time, money and reputation. It’s hard to do. Our brains are wired to be right, yet understanding we are wrong early on can be a huge benefit.

My only salvation when I find myself in this situation is to be intentional with my mindset. We can create more of an open-minded approach when we gather one or two of our best, more objective advisors to collaborate with us on the status quo and whiteboard other options.

Using this disciplined approach, we will make fewer mistakes going forward when we are faced with a situation where we recognize our investment, the lack of results and/or progress, and the forecast is not favorable.

By the way, we did have a great time. We got lucky and had sunshine the last hour.

Recognize your sunk cost situations, attack them with an open mind, and find those objective advisors and friends. Maybe this will help all of us on our next excursion/business venture.