Sunk Cost Fallacy

Another way of explaining Sunk Cost Fallacy, is to use the old saying  ‘ throwing good money after bad ‘.

Once you have invested a lot of time and money into a project or venture, then you are less likely to abandon the project or venture.

An example of this might be someone who starts a business making Chocolate Fireguards.

Whilst the novelty and absurdity of such a product might catch the public and possibly media’s attention initially, long term the venture is unlikely to make enough sales*  to be viable.

 

*Unless you used web niche marketing to promote your product worldwide.  To help achieve this, advertising platforms such as Google Adwords, can help target your advertising message to your desired potential audience.

 

A possible antidote to sunk cost fallacy might be to do what is known at ‘pivot’. That is change the direction and aim of the business to try and improve profitability and sales.

An example of this approach might be a dealer of two-way radio equipment (Walkie Talkies etc).  Due to the introduction of affordable mobile phones, many businesses switched in the early 1990s to mobile phones instead.

The two-way radio dealer was faced with a declining market for their products and services, which could mean having to reduce staff and other costs.

To avoid a situation where their business starts losing money in a declining market, they could pivot into a new growing market.

In the case of the early 1990s two-way radio dealer, the obvious choice would be to become a dealer of mobile phone technology.

The business is still working in the radio communications industry, as mobile phones and walkie talkies both use radio waves for communication.

Importantly, they are now in an expanding market, and therefore can avoid sunk cost fallacy, by continuing investing money in a declining business.

Finally it should be noted that the two-way radio industry actually made a comeback in the late 1990s due to deregulation of licencing, such as PMR 446. This encouraged an increase in sales and competition.