Sunk Cost Fallacy in Leadership

Domain: Self Awareness - Estimated reading time: 4 minutes

What is the project in your organization that has taken more time and resources than it should have with minimal results to show for it?

The one that people have grown frustrated by. The one that seems more like a burden than an opportunity at this point.

In for a penny, in for a pound. Right?

That's the sunk cost fallacy at work. The fallacy plays on the fear that you risk losing your previous investments (in this case, time, energy and resources). But those resources have already been spent. By staying with the project, you are just committing to losing more. That's where the fallacy comes in to play.

It can be tough to cut ties with a project that we've invested so much in. Especially if it was our idea to begin with. We become emotionally invested in a project succeeding because we don't want to look bad or fear the consequences of failure.

The 'in for a penny, in for a pound phrase' is a sign of how pervasive this is. Often times, that phrase is used to describe an unwavering commitment. But the answer to expended resources with little to show for it is rarely expending more resources.

We're using projects as an example today as it is the most common and relatable reference, but we do this in other areas as well. Employees that are not working-out. Promotions we've been chasing for years. Even in our personal lives.

Today, I'm providing some guidance to help with spotting and combatting this fallacy. Here are a few ways to do it…

Establish criteria

One of the things you can do to combat the sunk cost fallacy occurs before you're in it.

At the beginning of a large project, you'll likely be setting success criteria. While doing so, take the time to also set clear "kill criteria". In other words, what is the threshold that if not met, should cause you to terminate the project? Setting this ahead of time serves as a reminder down the line that you might be in sunk cost territory.

Kill criteria is separate from success criteria as success usually exists on a spectrum and is not a binary thing. Plenty of projects are largely successful even though they fail to meet the original aspirations. You don't necessarily want to kill these. Kill criteria covers the other end of the spectrum. It allows you to draw a line in the sand that says if we don't meet this threshold by this date, we should stop investing resources into this project.

Reset perspective

The sunk cost fallacy is so tricky because of our proximity to the problem. By the time we've reached this point, we've put considerable time and effort into it and we can't think as objectively.

This is where it's helpful to ask yourself some prompting questions to reset your perspective. There are two that I have found to be especially effective…

"If I was just hired to lead this group, where would I allocate our resources?" This type of prompt helps reset your strategy on today's conditions and knowledge as opposed to conditions 18 months ago when the project was first proposed.

"If we stopped this project today, how could we more effectively be using our resources?" At first glance, this seems similar to the first prompt. However, this one can help to shift your thinking from the costs you've already sunk to potential value you're forfeiting by staying the course. Essentially, you're using forward looking opportunity costs to fight the sunk costs that you can no longer recover.

Outside perspective

The tricky thing with fallacies and unconscious biases is that they are hard to self-identify. Despite what we'd like to believe, we are emotional and irrational creatures. This is where bringing in fresh eyes and a new perspective can help. Often times, others can see things that we can't see for ourselves.

With this approach, you want to find someone who is not close to the project in question. I don't recommend consulting only your boss or your team here as your work and performance is also tied to theirs. Instead, I recommend finding a trusted colleague or mentor who can look at the situation as an unbiased third party.

The trust part is huge here, as it needs to be someone who will be honest with you but also won't use it as leverage for their own priorities.

Thank you for reading. My hope is always that you've found something helpful and easy to implement. If you have feedback, suggestions or questions, please reply to this email.

If you are interested in exploring one-on-one coaching to transform your leadership, email me at [email protected] and we’ll coordinate a free, one-hour discovery session.

This week’s action items:

1. Define 'kill criteria' at the onset of big projects to help determine when to cut ties.

2. Reset your perspective with future-oriented prompts.

3. Invite trusted third parties, ideally a mentor, to add unbiased perspective when needed.