Beware of the sunk cost fallacy when planning your IT investments
written by Daniel Dolhy on November 18, 2015
One of our customers described how they went about purchasing a mobile CRM application: they first opted for custom development. The project then took longer than expected, costed more than estimated and the result was poorer that desired. What did they do? They scrapped the whole project after just 6 months in the making and went ahead and bought another solution, which now works as they want it to work.
What surprised me about this is that they didn’t fall into the trap of pouring more money into a dead-end project—they simply started all over (even though they have already done major investments up to that point).
Not many people would do this. Why? Because we tend to fall victims to the sunk cost fallacy.
What is the sunk cost fallacy?
In a nutshell, sunk costs are costs that have been already made and cannot be recovered. The sunk cost fallacy then appears when we make decisions taking these sunk costs into account. Where in fact, we should make our decisions based on what’s best at this point in time.
But we often think to ourselves: “We have already invested into solution A, so it makes sense to finish it and not change it now for B.”
We are being deceived by our minds. If solution B is a better choice now, we should go for it. But we rarely do. We give way to the sunk cost fallacy because it’s in line with everything we are instinctively prone to do–we tend to overvalue costs already spend, we are irrationally loss averse and we find it hard having to admit we have made a bad decision in the past.
Examples of sunk costs in a workplace:
“We cannot sell the stock now when they fell down so much. Let’s wait until they go up again to sell them.”
“We have already started building the factory, so we got to finish it. Never mind the change in regulations.”
“We have a CRM system in place and even though it’s a bit outdated, we cannot simply change it. There was too much time, money and effort invested in it.”
Examples of sunk costs in personal life:
Sunk cost fallacy sneaks up on us not only in our work lives but also in our personal endeavors. Just see, if any of these statements ring a bell:
“I am going to finish the book (even though I am not really enjoying it) as I am practically halfway through.”
“I should eat the whole meal I ordered, even if I’m already quite full. I don’t want it to go to waste.”
“I don’t really feel like going to the theater tonight. But I already bought the tickets and it’s too late to try to sell them now, so I might as well go.”
How to approach your IT (or any other) investments then?
When deciding on what investments to make, try and scratch the sunk costs of your list of pros and cons. Make the decision based on knowing what you know now, choosing the best alternative. Period.
Ask yourself: “If I were to make the decision today, would I go down that road again?”
The bottom line is that you should consider costs for what they are: gone. Nothing you can do about it. Instead of sunk costs (costs that are long gone and you can do nothing about), think about the opportunity costs (the cost of not opting for the best alternative now).
It’s hard to say “Let’s start all over” if you already invested into something.
I know it’s a hard thing to just walk away from an incomplete project. But you have to take into account the time, money & energy that are required to finish it. If these resources would be better off used somewhere else, you’ve got yourself a no-brainer. Even when your brain tries to tell you otherwise.
To read more about sunk cost fallacy, here’s a great article that summarizes it perfectly. And, of course, there are a lot more articles and books that talk about this topic.
BTW: if you’re looking for a Mobile CRM solution, we can help. We help companies get productive in the field, whether they are running Microsoft Dynamics CRM, Oracle’s Siebel CRM, SAP, other solutions or none at all. Get in touch with us through www.resco.net or at email@example.com