The sunk cost fallacy

Are your assets a liability?

3 big ideas

01

Resources are wasted every day by business leaders who are focused on avoiding perceived losses, rather than redirecting resources to take advantage of new opportunities.

02

Avoid falling into the same trap. Sunk costs are immaterial, but the opportunity costs of choosing to stay the course can have a massive impact.‍

03

Don't let executive hubris determine your operations and stifle innovation. Encourage forward-thinking and constantly re-evaluate your resource allocation.

What made us think

A sunk cost is a concept that shouldn't be foreign to any business leaders, it's economics 101; irrecoverable costs that have already been incurred should not be considered when making decisions about future operations. Unfortunately, people aren't always rational and resources are wasted every day by business leaders who are focused on avoiding perceived losses rather than redirecting resources to take advantage of new opportunities.

Our point of view

If you recognise the importance of customers' needs being the driving force behind your business goals, but you're spending money on existing projects that are not aligned with a customer-centric approach, you've fallen victim to the sunk cost fallacy. Break the cycle - don't let executive hubris determine your operations and stifle innovation. Encourage forward-thinking and constantly re-evaluate whether or not your resource allocation is contributing towards meaningful business goals.

Why it matters

In a corporate environment, it's easy to see how self-interested actors can be tricked by this logical fallacy - their job could be on the line if they're seen to be changing their mind too often or wasting money on new projects before old ones are seen through. However, there's a point where perseverance becomes pointless and perceived assets become liabilities.

The 2007 Queensland Health payroll upgrade debacle is probably the best large-scale illustration of a sunk cost fallacy in action, where over $1 billion was wasted pursuing a project as it went further off the rails. To avoid falling into the same trap, your organisation must carefully consider whether or not to stick with a tenuous project when there are viable alternatives to be pursued. When making these decisions, sunk costs are immaterial but the opportunity costs of choosing to stay the course can have a massive impact.

How it applies in the real world

Want to know more?
Speak with your
Service Design & Research
expert:
Laurence Crew

Laurence Crew

December 2018

Service Design & Research

Understanding and designing for customers

Relevant capabilities

Culture Change Design
Customer Strategy
Customer Value Proposition Testing
Customer-led Innovation
New Ways of Working

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