The Entrepreneur’s Sunk Cost Fallacy

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So you’ve worked hard to start your business. You’ve sacrificed time with family, time with friends, and spent an inordinate amount of your own time to get this business started. You’re doing everything you can to make it successful and you’re doing everything right. BUT what happens when none of that is working and the business is failing? How do you avoid the sunk cost fallacy?

First of all, you must understand the basic principles of failure and its relationship to entrepreneurship. Failure is not the end of the road in entrepreneurship; it’s a stepping stone. Fear of failure is one of the most common reasons we fall into the sunk cost fallacy. For instance, if you pay for a vacation, plan the trip, buy the airline tickets, then on the day of the vacation you are sicker than you ever have been, you still go. Right there, you’ve made the decision that all the planning and time spent to make the trip happen would be “lost” if you didn’t go not to mention the cost. You have fallen into the sunk cost fallacy.

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In entrepreneurship, fear of failure will likely cost you more money and more headaches than if you were to just accept that failure will likely happen at some point or another. One professor I had during my MBA mentioned that when you’re starting a business, do everything you can do to fail quickly. This way, you’ve limited the amount of time and money spent finding out your idea doesn’t work. He’s not saying that you should fail on purpose, but he’s saying that you should find all the holes in your plan as soon as possible. If you can fill them then do it. If not, move on to your next business idea.

So how do you actually avoid this fallacy? You must forget about your fear of failure and think in terms of the future of your business. Strive to gain perspective over the entire business and do everything you can to remove your emotional connection to the business. Our emotional connection to time and money causes us to make decisions we otherwise wouldn’t make especially if we are failing or losing money. If you find yourself saying “well we’ve spent this much time and money and etc. etc. etc. on this project so we shouldn’t stop now” you should literally stop right there and change perspective. Get a high level view of where you are going with the business and what it would take to reach your goals on your current track. Stand back and truly see if what you’re doing will get you where you need to go. Next, get into what I call the business mindset where you begin to look at the numbers and figures for the future without incorporating what you’ve already spent. Look at what it will take to get the business up and running or to complete the development of the project. Only look forward into the future and decide if there is a clear path to make this work. Are there any holes in that plan? Are there areas that need more definition? Can it even be defined?

The reason I say only look forward is because you should be able to more clearly see what is necessary to reach your goals. You may see that there is no end in sight or that there is no potential for this business you’re developing. Regardless of what you’ve done in the past, a forward looking perspective is the best bet at beating the sunk cost fallacy. Sunk costs are always in the past and hopefully you are able to get a high level view before you’ve spent too much time or too much money learning that your business will fail.

When have you seen this fallacy in your business? What did you do to counteract it? Did you end up losing more money? Leave a comment!


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