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In his book “The Art of Thinking Clearly”, Rolf Dobelli talks about the “Sunken Cost Fallacy”. This is where people keep on with a particular path of action for no other reason than the amount of time or money that they had already sunk into the path of action. People do this as they feel that changing path would be a waste of that time or money.
There are numerous examples of this in action every day. An obvious example would be a project in the work place (advertising campaign) that does not appear to have worked as well as it should have. Often people will continue down the path of the project as they have already sunk so much money into it and do not want to lose the money. This is in spite of their better judgement which would be to scrap the project and try something else. Another example is buying a share that drops dramatically in price, with no fundamentals to support it rising again – and people hold onto it.
I have seen this in action with a group of investors when we purchased a property that we believed had development potential. 6 months after purchasing the property we realised that the development would be harder to achieve than what we thought possible. A motion was tabled to sell the property, which at this stage had increased enough in value that it would have enabled us to get out having only lost around $20,000 due to cost.
This motion was defeated. The reason put forward by one of the investors as to why he would not support the motion was that “I have never lost money on a property before”. We sold the property 3 years later at a loss of just under $300,000!
The main reason people become victim of this is because if they scrap the project, they would have to admit that they made a mistake in the beginning. This is not something that people like to do so they continue down a path which will end up costing them more money and time in the long run.
Can you think of a time where you spent too much time, money or energy on something that was a lost cause?
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