The Sunk Cost Bias
A mental trap that makes us hold on to loss-making investments or projects. And the reason why is because you've already put time, energy and emotional effort into it AND you're hoping to recover from the losses.
In October 1956 the UK Ministry of Supply asked Welsh Aeronautical Engineer Morien Morgan to form a study group. They called it the Supersonic Transport Aircraft Committee (STAC).
The British Government gave STAC a £1 million contract for a feasibility study. The goal was to design a SST project and find the right industry partners to build it.
SST is jargon for supersonic transport. Which basically means any transportation that's faster than the speed of sound.
STAC called the project 'Concorde'.
After failed negotiations with America, Britain decides to search for a new partner.
France and the UK shared the same dream. To build these supersonic airplanes that could fly across the Atlantic in under four hours. So in 1962 France joins the Concorde project.
The British and the French Government sign a treaty. They agree to share design, development and production costs. They estimated the project would cost about £150-170 million.
But by 1973 the development costs had risen to £1.065 billion.
When Concorde made its first commercial flight on 21 January 1976, the project was financial disaster.
Britain and France realized that the project wasn't going to pay off. The Concorde project wasn't profitable. It was impossible to recover from such shocking cost overruns.
But Britain and France continued to sink money into the project anyway. To save face. And because they had already invested billions.
On April 10, 2003 the inevitable happened. Air France and British Airways announced they were retiring their fleet of Concorde aircrafts. This was the end for Concorde.
Here’s the thing. Our brains tend to think of money we've spent as money that's "still on the table". Behavioral economists call this the "sunk cost bias". This mental trap is also known as the Concorde Fallacy. I'll tell you more about it in a minute. But first, let’s talk about sunk costs.
A sunk cost is a payment or an investment you can't recover by any means. Research & development, marketing & advertising expenses or rent are classic examples of sunk costs. But sunk costs aren't just financial. They can also be based on how much time, emotion, or effort you've invested in something.
Ever wondered why do people finish watching movies or reading books they aren't enjoying?
Or why do people keep paying their gym membership but never go to the gym?
Or why they keep so many clothes in their closet that they are never going to wear?
Or why do people hold on to stocks or other investments that are underperforming?
The answer? The sunk cost bias, a mental trap that makes us hold on to loss-making investments or projects. Just because you've already put time, energy and emotional effort into it. And you're hoping to recover from the losses (Kahneman & Tversky, 1979).
Now that you understand the human psychology behind sunk costs (Hal Richard Arkes & Catherine Blumer, 1985) you are in a much better position to predict and influence customer behavior. And also your own behavior.
Takeaways for your business:
1. Avoid taking sunk costs into account when making business decisions.
Good business decisions should always point to future benefits. We've all made decisions that don't work out. And that’s fine. We’re humans, shit happens. But good decision makers know when to give up on a bad investment.
2. Informing your website readers of a sunk cost can actually help you increase your sales.
One of my clients, Sunday, a direct-to-consumer mattress startup from India does this well. When you put through an order on their website, this is what happens:
Your cart reminds you what's your total investment (notice that the copy I wrote doesn't say "total price". It says "total investment"). Then below you'll see another message I wrote. It says, "Bedding essentials to turn your sleepless nights into blissful nights. For only a few Rs more."
This little persuasion trick can help dramatically increase Sunday's average cart value.
Just by reminding customers how much they've already invested. And highlighting that for just a few extra indian rupees they can complete their bedding collection.
3. Make people chase their good investment.
Imagine you’re selling lacquer. And your brand is called Lacquer Gold. Deep down inside, both you and your target customer know this. When you brake things like a jar or a vase, the easiest thing to do is throw that piece away and buy a new one. But you really loved that old jar. And it was a really realllllllly expensive jar.
So here's what you could say:
"If you've invested in a beautiful jar or vase, but recently broke it, now there's a better alternative to throwing it away. Embrace the imperfect and give it a new life with Kintsugi - the beautiful Japanese art of repairing broken pottery with gold. All you have to do is glue the pieces together with Lacquer Gold and gold powder (the gold powder is on us.)"
