We'd all like to believe that we make decisions based on the best possible future trajectory given all of the available information at hand. But it's pretty common to pour more and more resources into a dead end rather than admit defeat. If you're a really thoughtful decision maker, that may be the case when you first approach a change. However, even the best leaders struggle to re-evaluate mid-course and accept the fact that we're clearly going under.
Part of it is an essential bit of entrepreneurial optimism and part of it is a fear of loss, which is apparently genetically encoded from our ancestors: those who were risk aversive were more likely to survive to parenthood and pass on the predisposition.
But we don't live in the time of saber tooth tigers and groin cloths anymore. No revolutionary success ever got off the ground based on the risk calculation and many certainly would toss in the towel when the inevitable waves washed over the sides of the little boat. That being said, there comes a point when sinking is inevitable and it's time to switch gears and try a different boat.
It can be hard to tell whether it's fear or optimism that drives us to purchase deck chairs for the sun-soaked beach that certainly lies ahead while our feet and fellow travelers get soggy, but developing the awareness and distance to call it quits when you've passed the point of no return is critical if leading the next boat, or an armada, is in your future.
In order to combat our tendency to believe we are the leadership-embodiment of Leo Dicaprio at the front of an unsinkable ship, the business world came up with the term sunk costs.
What's a sunk cost?
It's the money, time, and other resources that are lying at the bottom of the ocean, completely unrecoverable. The Titanic has broken in half and no amount of money or effort is going to put it back together and deliver the passengers to America.
You have a few options here:
- You can pretend that the Titanic is unsinkable. More time, money, and adjustments will certainly fix the problem.
- You can watch the ship sink in abject horror and sob violently over your losses.
- You can face forward, learn from the mistakes, and cut your future losses as early as possible. No use crying over sunken ships.
An everyday example:
You purchase non-refundable tickets to a major concert for over $200. You dye your hair blue and make the 30 minute drive to the arena. 15 minutes into the show, your absolutely miserable. Turns out this particular band only sounds good synthesized on the radio and the lip syncing that you can clearly see from the front row seats you paid handsomely for is appalling.
What do you do?
The irrational part of us says, "I paid $200! I drove all the way here! I dyed my hair blue!" So, you stay and get angrier with each mutilated song.
If you're feeling particularly rational, you say, "I am not enjoying this at all and I think I would rather leave now, grab a pizza, and catch up on Big Bang Theory." So, you go and have a wonderfully funny evening.
Irrational decisions aren't a huge deal on this scale, but organizations buy much more expensive "concert tickets". In fact, the sunk cost fallacy is nicknamed the "Concorde fallacy" after the $6 BILLION (in today's dollars) dumped by the British and French into the development of the Concorde aviation project for many years after it was crystal clear that the venture would never produce a return. Just the year-to-year operating costs AFTER the Concorde was developed ran in the red.