The sunk cost effect – The desire to follow through with a course of action even though you know it isn’t right due to the amount invested – is well documented. Here is a bit of career coaching on the sunk cost effect and how to avoid falling victim to it.
We’ve all heard of the sunk cost effect. It’s often talked about as “throwing good money after bad” or the “Concorde effect” (referencing the follow through and building of the Concorde jet even after it was clear it would not be profitable).
So what does the sunk cost effect have to do with your career? Potentially, a great deal. Let me get to that in a second.
First, let me start by saying that people are not exactly rational. Here is a question asked in a 1985 study by Arkes and Blumer:
Assume that you have spent $100 on a ticket for a weekend ski trip to Michigan. Several weeks later you buy a $50 ticket for a weekend ski trip to Wisconsin. You think you will enjoy the Wisconsin ski trip more than the Michigan ski trip. As you are putting your just purchased Wisconsin ski trip ticket in your wallet you notice that the Michigan ski trip and the Wisconsin ski trip are for the same weekend.
It’s too late to sell either ticket, and you cannot return either one. You must use one ticket and not the other. Which ski trip will you go on?
It turns out that over half the people would rather go on the ski trip they would enjoy less but paid more for (Michigan)!
So the sunk cost effect is alive and well. What does it mean for your career?
The sunk cost effect and bad decisions
Bad decisions are easy to make in the business world. In almost all cases a decision has to be made with imperfect information and in the context of a shifting environment.
Strategic decisions in particular, tend to require long-term investment with only a guess of what the future may bring. The result is that these decisions are often wrong.
Yet, once the realization is made that a course of action is likely to fail, individuals and organizations are extremely likely to follow them through to the end (and throw good money after bad).
Why? One theory is that our society has conditioned us to avoid waste. We have been hearing that we should “avoid waste” since we were children, and the sunk cost effect may be a function of us over applying this rule.
In another H.R. Arkes study (1996), participants were asked to imagine that they were in a firm that was developing a new product to bring to market. They were told that after they had made a significant investment a competitor had created a far superior product. The question was whether they should abandon their product development efforts.
In this case, there were two conditions: one in which the investment was a total loss and a second in which some of the investment could be recouped by selling their prototype and initial materials to a firm in an unrelated industry.
What did they find? Participants were far more willing to abandon the project if they could recoup a portion of their initial investment.
In other words, they didn’t want to “waste” that initial investment, and by not wasting it, they could abandon an untenable project.
So the key in making decisions is to recognize when sunk costs are influencing your decision to persevere when you really shouldn’t. Except…
The sunk cost effect and organizations
The problem with the nice idea of simply recognizing the sunk cost effect and making logical decisions is:
- It is hard enough to recognize when you are making a sunk cost error
- It is even harder to get an organization to recognize a sunk cost error
At the point when a strategic project’s viability is in question, you likely have a huge amount of sunk cost.
- If you are a leader, you have convinced your peers, bosses and subordinates that this is a good idea, using a fair amount of social capital
- You have financial resources already sunk into the project
- You may have outside stakeholders (suppliers, customers, etc) all bought in
On top of that, you have prospect theory (the human tendency to take risks to avoid the pain associated with losses) working against you as well. In other words, roll the dice because maybe, just maybe, this project can be pulled off.
Further, in some firms the only one who can stop these projects is likely to be the CEO, who may not be receiving the information necessary to put the brakes on things… and of course is just as likely to fall victim to the sunk cost effect.
The sunk cost effect and your career
So, what does all this mean for your career? Well, first you need to be aware when you (and your firm) are making decisions based on the sunk cost effect.
Second, beware staying at a firm where your career is stagnating due to the sunk cost effect.
After you have been at a firm for a few years, you tend to have quite a bit invested. You have developed relationships, have projects that are showing results, know how to get things done, and probably have some equity that has vested.
At this point, this is the really difficult question to ask yourself:
If I ignore all the work I have invested at this firm, would I still choose this firm/job?
It is a really important question. It is so easy to get caught up in where we are and not want to walk away from all that we have invested. Yet the beginning of a great career is being willing to ask this question.
I recommend you ask yourself it at least once a year. The day after bonuses are paid (or perhaps your next tranche of options vest) is a great day to ask the question. There is nothing hanging over your head and perhaps you may have a moment of clarity.
As one of my clients recently said to me (and I totally agree with), the dangerous job is not the miserable one that pushes you to take action, but the okay one that never amounts to something more.
So, how is the sunk cost effect destroying your career?
- By causing you to work on projects that don’t have a future for far too long, taking away your focus and energy from the projects that can truly drive you forward.
- By causing you to accept being in a job/career/industry that is just okay because you don’t want to walk away from your investment
In other words, it is keeping you from the projects that will bring you greatness and it is keeping you from doing the work you were meant to do at the place you were meant to do it.
It is really hard to look rationally at the situation you find yourself in and walk away from a past investment. Sometimes, it is what you need to do for the career (and the life) you really want.
If you are looking for career coaching to take your career to the next level, schedule a complimentary career coaching conversation with me here.