Avoiding Sunk Cost Bias

Finding the value in our investments is important to us. So important, that the more we have invested in something, the more committed we are to making it work – even when we know it doesn’t. Our commitment to making a success of any time, money, or effort investment is so powerful that we often continue to invest even when failing. We just don’t seem to be able to let go.

When you sit through a bad movie because you have paid the price for admission, or continue to run a tv campaign that does not show a return because of the high cost of developing the commercial you are falling victim to the sunk cost fallacy.

But there is a good side to a sunk cost. Beyond the continual reminder of how illogical we are sometimes, it can be used in marketing (and often is) to motivate customers to stick with something they have invested in. This is the use we are exploring in this article.

The Theory

The rational among us like to think that decisions are made based on the potential return that an investment is likely to have for us. This is the logical position and, in most cases, the preferred method for making a decision.

However, many of our decisions are influenced by the emotional or financial investment that has accumulated around the object of our decision. The greater the investment, the less likely we are to abandon it.

Behavioral experiments have demonstrated sunk cost effect on numerous occasions. They have also refined our understanding in the following ways.

  1. When several investments have been made, we tend toward the more expensive one even when it has the same or even less value than others.
  2. The larger the investment, the more difficult it is to stop.
  3. If there is ambiguity in the results of an investment, we tend toward continuing with it – presumably to reach a clear outcome.
  4. A loss may act as a stronger motivator than a reward. Losing $10 is perceived as more painful than the perception of pleasure received though gaining $10.

In Action

The behavioral implications of sunk cost have two important considerations for your business.

  1. Avoid sunk cost bias in business decisions for your practice
  2. Assist your customers to stay on track with worthwhile tasks by reminding them of sunk cost.

Avoid Sunk Cost in Your Business

“Throwing good money after bad” is not a successful business strategy. Project leaders and business owners who have the most to gain or lose by decisions are most susceptible to sunk cost bias. Rely on and listen to trusted advisors or consultants without a stake in the project or results. A rational decision using only future return predictions is more likely to come from people who have no emotional or financial investment in the decision.

Take notice of the following:

  1. Training is a sunk cost. Do not retain a poor performing staff member because of the amount spent on training.
  2. Technology is a sunk cost. After ensuring that the product is being used correctly, regardless of your investment in new software or technology, if it isn’t providing a clear return in cost, time, or insights, do not continue using it.
  3. Marketing and Advertising. Set up a method to track the ROI on all campaigns. No matter what, if a campaign is not performing, stop it sooner rather than later.

How to Use Sunk Cost Bias in Marketing

Not all sunk cost bias is negative. Assuming that your commitment to consumers is to ensure they receive the best result possible from any investment with you, try some of the following strategies in your marketing.

  1. Arrange complex or expensive tasks into a series of smaller, lower cost commitments so that the time and money investment accumulates painlessly.
  2. Remind customers of their investment frequently. Focus on the loss as often as the gains. Remember that if you are motivating, fear of loss is more powerful.
  3. Integrate existing investment into upsell opportunities for your customers.
  4. Consider complimentary program reviews to establish progress and reinforce sunk cost.

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