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BizBoost News
Volume 12, Issue 18
For distribution 3/6/23; publication 3/9/23

Is Sunk Cost Bias Affecting Your Spending Decisions?

As business owners, we’d like to think that we make rational, logical decisions when it comes to our business finances. However, scientists have discovered that we have built-in biases in our brains and our thinking processes, and one of these biases is the sunk cost bias. 

A sunk cost is simply money, time, or resources that you have already spent and can’t get back. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions.

One example is when you have already invested a lot of time and money in a losing project. You continue to do so even if the benefits are not worth it. Let’s say you have spent a lot on car repairs. You continue to repair the car, digging a deeper and deeper hole. Buying a new car would be the better decision because the benefits would outweigh the costs, but you are still emotionally (and irrationally) attached to all the money you spent on the clunker.

You can also fall into the sunk cost trap with relationships. Let’s say you have an employee that is a borderline performer. You keep investing in them, thinking you can “fix” them, and they don’t improve. You should have fired them a long time ago! 

Scientists Daniel Kahneman and Amos Tversky studied cognitive bias, including the sunk cost bias, in case you want to read more about the topic. Kahneman won the Nobel prize for his work.   

How can you avoid falling into the sunk cost bias trap? Here are some ideas:

1.      Be aware that it exists and it affects more of our daily activities than we realize.
2.      Track key performance indicators regularly so that you can see whether you’re on or off track. 
3.      Detach emotionally, if possible, from your business project.
4.      Set goals and milestones on your projects and have a “walk away” plan if things spiral out of control.
5.      Stay future-focused.

Now that you’re aware of sunk cost bias, you can be more mindful when making financial decisions.

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Our latest blog: “Is Sunk Cost Bias Affecting Your Spending Decisions?” is available now! Subscribe here: [link]

As business owners, we’d like to think that we make rational, logical decisions when it comes to our business finances. However, scientists have discovered that we have built-in biases in our brains and our thinking processes, and one of these biases is the sunk cost bias.  Learn more in our latest blog article: [link]  

A sunk cost is simply money, time, or resources that you have already spent and can’t get back. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions. Learn more in our latest blog article: [link]

#BusinessTip: To avoid falling into the sunk cost bias trap, be aware that it exists and it affects more of our daily activities than we realize. Learn more here: [link]

Want to avoid falling into the sunk cost bias trap in your business? Try tracking key performance indicators regularly so that you can see whether you’re on or off track. Find more here: [link]

DID YOU KNOW… To avoid falling into the sunk cost bias trap, you can set goals and milestones on your projects and have a “walk away” plan if things spiral out of control. Learn more here: [link]

#BusinessTip: To avoid falling into the sunk cost bias trap, detach emotionally, if possible, from your business projects. Learn more in our latest blog article: [link]

Are you aware of sunk cost bias and how it plays out in your business? In our latest blog article, we explain what the sunk cost bias is and how you can be more mindful when making financial decisions. Sign up for our newsletter to learn more: [link]