We have a lamp in our house that nobody notices. It’s plain, boring, and doesn’t fit with anything else. It looks like it should be part of a matching pair, but it’s not.
It was a wedding gift.
I can still remember my about-to-be husband and me just staring at it, somewhat perplexed. Only because I knew the gifter was into fine art did I even have the inkling to do a little research.
“That lamp cost $400,” I told my husband.
“What? That lamp?”
“Yep”
“But it’s so …”
“I know.”
“And we didn’t even want …”
“I know.”
So why do we still have it? Because Barbara Benson spent $400 on it 15 years ago.
Did I know her very well? No. Is she going to come by to check if her lamp isn’t here? Also no. If I knew that the lamp only cost $20, would we still have it? Definitely not. So, why are we hanging onto it?
What Is the Sunk Cost Fallacy?
We still have this lamp because of the sunk cost fallacy. It’s a bias that describes our tendency to follow through on something we’ve invested time, effort, or money in, regardless of whether the current costs outweigh the benefits.
And yes, we feel the need to honor other people’s sunk costs as well, which is likely why I still have Barbara Benson’s damn lamp.
Lately, we’ve been looking at biases. What are some of the most common ones that impact sales professionals? Why do we have them? And how can we combat them? The sunk cost fallacy is one that everyone has experienced at some point.
Have you ever finished eating an expensive meal even though you were full after eating half of it? Sunk cost fallacy.
Have you ever watched a movie to the end even though you weren’t enjoying it? Sunk cost fallacy.
Have you ever continued to spend millions on the Concorde project even once you knew it wouldn’t be profitable? Okay, so that last one doesn’t apply to quite as many people, but it is what happened with the Concorde supersonic airplane. The French and British governments continued pouring money into it even after they knew it wouldn’t be successful … because they had already spent millions on it.
The sunk cost fallacy can impact us on a personal level, such as when we eat too much because “darn it, we paid for dessert.” It can also have a larger impact at the organizational level, such as when an entire company refuses to change its business strategy despite red flags telling them they need to because “this is the way we’ve always done it” (think General Motors in the 1990s).
Wars and regional conflicts with no clear goal impact millions of innocent people, but “how can the lives lost and resources spent be justified if we didn’t win?”
Economic theory tells us that when we make decisions, we should be guided only by future gains and losses. If we’ve paid for a movie and halfway through, we hate it, the cost of the ticket should no longer matter. Either way, we aren’t getting that money back (hence the “sunk” in sunk cost).
A rational person would only consider whether they wanted to spend the next hour miserable or doing something they enjoy. But we’re human beings—meaning that we’re not rational—and our brains don’t let us forget what we’ve already poured time and/or money into something.
You’re in Good Company (Actually Not Really)
If you’ve read our blog before, you know that we often write about how our behaviors are largely driven by how we have evolved and what was best for our caveman selves. I won’t be comparing you to a caveman today. I’m afraid this situation is much worse.
Our tendency not to let go of the resources we’ve already spent is not uniquely human. They aren’t even uniquely simian (apes and monkeys). Research has shown that we share this trait with mice, rats, and probably pigeons (which are basically sky rats, so it makes sense).
What’s more, humans, mice, and rats will all dig their heels in even deeper (I don’t think pigeons technically have heels) the more resources (time in the case of the study) they have already dedicated.
Previous studies revealed that mice, and I quote, “express remorse for poor decision making.” Can’t you just picture this poor little lab mouse coming to terms with her horrible life choices?
Mice, rats, and people are likely using similar neural systems to make decisions. What’s perhaps most fascinating is that the research suggests that we use different neural processes for our initial decision (e.g., should I buy these football tickets?) than we do our “whether or not to stick with it” decision (e.g., should I go to the football game that I bought the tickets for now that it’s snowing and I don’t feel well?).
Murid (mice and rats) studies provide evidence for two distinct phases of decision-making. They show that certain drugs impact one type of decision but not the other. Cocaine, for example, disrupts rational deliberation that occurs before a commitment is made, while morphine inhibits one’s ability to cut their losses after making a poor decision.
Wait, these poor mice are feeling remorse for their bad decisions, while meanwhile, we’re giving them cocaine?! That hardly seems fair. And do we really need a scientific study to tell us that cocaine disrupts rational deliberation? That seems like something we should already know.
Don’t Let Sunk Costs Sink Your Sales
How can the sunk cost fallacy impact sales professionals? It’s the reason we keep prospects in our pipeline that we know aren’t going to close. Keeping dead deals in your pipeline is a perfect example of the sunk cost fallacy in action.
You’ve invested so much time into this prospect. Your last two or maybe five messages have gone unanswered, and you haven’t had a chance to speak with the actual decision-maker. Your contact was so excited about your solution, and you’ve demoed it for her and several others in her organization. You really thought it would close last quarter; in fact, you had hoped it would close the quarter before that.
Does this sound familiar?
So, What Can We (And the Mice) Do?
Now that you know about the sunk cost fallacy, what can you do to combat it?
- Knowing is half the battle. One good thing about the sunk cost fallacy is that, unlike some of the other biases humans are prone to, simply knowing about it can help you look at decisions more objectively.
- Grow up. Research shows that the older we are and the more experience we have, the less likely we are to succumb to the sunk cost fallacy.
- Know where you stand. There’s an online quiz based on research done by the European School of Management and Technology in Berlin that tells you how susceptible you are to the sunk cost fallacy.
- Measure those micro conversions. Micro conversions are a great way to check the pulse of a sale throughout the process. They can, as the name suggests, be quite small. Something as simple as responding to an email or scheduling a meeting can be a micro conversion you choose to keep tabs on. These positive micro conversions tell you your deal is healthy and on the move.
- Clean up your pipeline. The best way to stop wasting resources on those deals that you know deep down aren’t going to close is to get them out of your pipeline. Keep your CRM clean, and as an added bonus, your boss will stop asking why that deal hasn’t closed yet.
We’re all human, and we’re all susceptible to a number of biases. Knowing about them is the first step toward ensuring you don’t fall victim to them.
And remember, no cocaine. Science says so.
Contact us at mastery@maestrogroup.co to learn more about our behavioral psychology-based training.