Today’s topic, I’d like to explore today through the lens of L&D is the sunk cost effect. I first heard about this on one of my favorite podcasts Freakonomics. The topic of the episode I heard it on was about losing. Not the sexiest topic I know but it was what came up in the queue and it hooked me in.
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What is the sunk cost effect? Simply, it’s the tendency to continue investing in an endeavor because of past investments of time, effort, or money in that endeavor, even when the payoff or return on investment is no longer available.
The sunk cost effect is the tendency to continue investing in an endeavor because of past investments of time, effort, or money in that endeavor, even when the payoff or return on investment is no longer available. Rationally speaking past investments, or sunk costs, should not influence decision making. Let me repeat this. If it worked previously, you shouldn’t automatically do it that way again or let that influence your decision making. Instead, looking at the current situation and the factors impacting the current project. Of course, it’s not always this simple and people don’t always have this line of thinking. If I had a dollar for every time I’ve heard, “We’ve done training like this for X years, why should we change it now?” I could retire. I think most of us could. Often this line of thinking impacts everything: design, project management, and daily life. How can we as L&D folks inspire change?
For a class I took a few years ago, it was required to read Everett Rogers’ Diffusion of Innovation. This book may be old but it has a lot of great information about being a change agent and inspiring change. One takeaway for me is that change relies heavily on human capital. In other words, how much support an idea can impact its longevity. The importance of having champions for learning cannot be overstated.
Let’s say you have an L&D consulting business and you want to make a super easy storyboard template to generate some side income. You’ve put a ton of work into it and the week before you are due to launch, an L&D professional development society offers a similar product for free, even to non-members. Do you keep going and launch yours at the cost you were going to sell at? Or back off? Let’s say you keep going and all the time and effort you put into this only netted you 5% of the income that you put into creating it.
This is an example of the sunk cost effect. People are susceptible to errors in situations like these because they fear failure more than they desire success. And because they don’t want to feel or appear wasteful. We have all heard the idiom, “Winners never quit, “and quitters never win.” Well, it turns out this isn’t true at all. Sometimes the only way to win is to quit.
So how can we avoid errors due to sunk cost effects? Normally, recognition is the first step to recovery. Let’s take a look at some research. Going back into the time machine to 1995, Tong & Yates found that sunk cost effects are multi-dimensional. In other words, there could be multiple factors at play in sunk cost effects including company culture and policies.
Often times a significant negative emotional event is required to disrupt the sunk-cost and force people to reevaluate their decisions. Accordingly, when such events occur they should be used as opportunities for reflection and reconsideration. So whether you use your knowledge of sunk cost effects to make better L&D planning decisions or to know when to end learning initiatives with no realistic prospects of success, remember: there is great power in knowing when to quit.