A Different Look at the Sunk Cost Fallacy

“There’s no way we’re going to make it.”

It was pushing four o’clock, and the Turnpike Troubadours concert started at seven.

No problem, right?

Not this time, unfortunately.

Our problem was that Kiersten and I were an hour and a half away from the venue. And we were standing by the barn trying to fix the fence so our wily sheep didn’t escape. Again.

We’d been working on this project for most of the day and we weren’t exactly “concert-ready.”

Boots at an event like this would be fine.

But wearing boots that smelled like ours did after tromping through the unmentionable substances in the pasture didn’t seem appropriate.

And, honestly, we didn’t smell a whole lot better than our boots.

So, just like you do every day as a business leader, Kiersten and I had a choice to make.

Were we going to stick with our plan to celebrate our anniversary and rush to get to the concert?
Or would we give up a couple of hundred bucks and do something different?

I’m sure you know the feelings we were going through.

Should We Stay the Course?

You’ve probably been in the same spot I was in. Not standing in your manure-filled boots in a sheep pasture, but mentally.

You’ve made a financial investment in the past based on solid reasoning and now things have changed.
Things aren’t going as planned and you’re going to have to invest more resources to get the outcome you expected.

More money,
more effort,
more time.

That’s in addition to your original investment.

So, you’re faced with a choice.

Do you stay the course, or do you cut your losses?

At this point, you’re susceptible to a cognitive bias called the “sunk cost fallacy.”

Beware the Sunk Cost Fallacy

The sunk cost fallacy originated in the study of economics and psychology. It was popularized by Daniel Kahneman in the book Thinking, Fast and Slow, which I found fascinating. It’s not a quick read (for me anyway), but it was really interesting.

The simple explanation, from an economics perspective, was that leaders should apply a clear decision rule to decision making:

What you’ve already invested, i.e. sunk costs, cannot be recovered so they should not influence your decisions. They’re irrelevant. Only future costs and future benefits matter.

This sounds good on paper because it’s rational, but as Kahneman explains, humans don’t always behave rationally.

That’s where psychology becomes a factor in our decision making.

We, as humans, are emotional beings and we hate loss. In fact, we hate loss even more than we love gain.

Stopping something we’ve invested in causes us emotional pain. We feel like we’ve made a mistake and have failed.

To avoid that pain, we tend to just keep going, despite what our rational brains are telling us.

This happened with the Concorde project, perhaps the most famous example of the sunk cost fallacy (which is also sometimes called the “Concorde fallacy” as a result).

This article describes it well.

The Concorde fallacy is a famous example of sunk costs impacting large-scale decisions. In 1956, the Supersonic Transport Aircraft Committee met to discuss building a supersonic airplane, the Concorde. French and British engine manufacturers and their governments were involved in the project, which was estimated to cost almost 100 million dollars. Long before the project was over, it was clear that there were increasing costs and that the financial gains of the plane, once in use, would not offset them. However, the project continued. The manufacturers and governments followed through on the project because they had already made significant financial investments and dedicated a lot of time to the project. Ultimately, this led to millions of dollars wasted, and the Concorde operated for less than 30 years.

Not every decision you make as a business leader involves hundreds of millions of dollars and decades of your teams efforts, but they all require precious resources.

For Kiersten and me the money we spent several months ago on those two concert tickets wasn’t a huge amount. But it was still real dollars to us.

And, if we didn’t go listen to one of our favorite bands, we were going to lose it.

Or at least that’s how it felt.

As we stood out in the cold winter wind trying to decide what to do with the rest of our Saturday, I started thinking about how the sunk cost fallacy applies to personnel decisions with our team members.

This may seem a bit counterintuitive, so please bear with me as I explain it.

Being aware of the sunk cost fallacy and trying to avoid this cognitive bias could actually work against you when you’re dealing with your people.

I’ll explain what I mean with an example scenario.

Your New Employee, Ben

Let’s consider a situation where you’ve added someone new to your team.
His name is Benjamin and he goes by Ben.

As you look back at the past several months, it seems that you took the steps you were supposed to take.
But something is still off with Ben.

1. You carefully recruited for your open position.
Finding Ben wasn’t cheap. And he still seems to be a great fit for our company’s culture.

2. You intentionally onboarded him.
You invested your time and his teammates’ time making sure he had a positive and valuable first 30, 60, and 90 days.
Alex, Maria, and Pramit could have been doing other important work but you had them spend time with Ben.

3. You supported and even defended Benjamin.
You put your own reputation on the line when you advocated for him when Paulina questioned his performance.

But now Paulina isn’t the only one asking hard questions.
Other colleagues are hinting that hiring Ben may not have been your best decision.
And, if you’re honest, you’re not seeing the results you expected either.

So, you start thinking that it’s time to let Benjamin “explore other career opportunities.”

But your inner voice is saying things like:

“We’ve invested too much to train him.”

“I don’t want to admit I made a hiring mistake.”

“All that money spent on recruiting was wasted.”

But because you’re a leader who is fully aware of your susceptibility to the sunk cost fallacy error, you know you should ignore those thoughts.

You should let Benjamin go.
Before any more damage is done.
“Hire slow, fire fast,” you read somewhere.

Right?

Only you can make that decision, but let me invite you to consider another step to take before you show Ben to the door.

Here’s my reasoning for mentioning this.

Looking Differently at the Sunk Cost Fallacy

What if your newest team member, Ben, is struggling not because of any failure on his part or shortcoming of your efforts so far, but for a different reason.

What if Benjamin truly is a perfect fit for your company culture and belongs in your business
but the root cause of his poor performance so far is something less obvious?

Something relatively easy to fix.

If that were the case, you would avoid:

• The emotional and financial costs of letting someone go.
• The opportunity costs of not having a fully staffed team.
• The financial investment to hire and onboard, again!

While you pausing does have a real cost and you are susceptible to the risks of sunk cost thinking, there’s a huge upside if you can keep Ben on the team.

If you’re willing to try it, here’s what I recommend.

My Recommendation

Have a direct conversation with Benjamin.

Tell him that his performance is not meeting your expectations and give him specific examples.

Hopefully, you’ve already been doing this in your weekly one-on-one meetings with him, and this is the continuation of an ongoing conversation.

While this might make you a bit nervous, especially at first, I want to remind you of three things.

1. Being clear with a direct report about your expectations and whether or not they’re meeting those expectations is kind, not cruel.
2. Talks like this are often referred to as “courageous conversations” for good reason. It’s natural to be a little nervous, regardless of which side of the desk you’re on.
3. Your input is NOT going to surprise Ben. You hire good people and he knows he’s not performing to his full potential.

Be genuinely curious and ask Ben why he thinks he’s not delivering the results the business needs.

It might sound something like this.

“Ben, it seems to me that you’re not yet able to hit the performance goals we outlined last week when we talked. I know that must be frustrating for you.
We’ve both been working at this for some time now and I’m wondering what I’m missing.
What do you think is holding you back?
Is there something you would try if you were sitting in my seat so we can make sure you’re performing at your best?”

Based on my experience, Ben may share information that helps you better understand why things haven’t yet clicked with him on your team.

Ideally, you would have this conversation in a neutral setting to shift the power dynamics so he feels more safe to share his input openly with you.

Walking together in a relatively private location has worked well for me in situations like this.
This is much more disarming than sitting face-to-face in my (Ben’s leader’s) office with a big desk between us.

There’s one more technique that I also recommend.

Using The Six Types of Working Genius to Avoid Turnover

The Six Types of Working Genius Assessment is an outstanding tool to use as a guide for a conversation with an underperforming team member.

Compared to the cost of firing and replacing an employee, it’s nearly free.
It takes about 10 minutes to complete, and it’s $25 (as of the time when I’m writing this.)

You can simply ask Ben to go to workinggenius.com to buy the assessment and have him share it with you using these easy instructions.

You can click here to see my Working Genius Assessment so you know what to expect, but here are the basics.

The 6 Types of Working Genius Framework – The Basics

If the 6 Types of Working Genius Framework developed by Patrick Lencioni is new to you, here are a few key highlights to help you understand the model.

• The tasks we do to complete any project can be grouped into six different types or “geniuses”.
• Each of the six is required to accomplish any type of endeavor. Every “project” requires all six geniuses.
• No one person has all six Working Geniuses.
• Each type of genius receives and/or gives something to the adjacent type. There’s a natural flow of work: W-I-D-G-E-T.

The Six Types of Work Tasks or “Geniuses”

1. Wonder: identifies the need for improvement or change
2. Invention: confirms the importance of that need, and generates an idea or solution
3. Discernment: assesses the merit and workability of the ideas or solution
4. Galvanizing: generates enthusiasm and action around the idea or solution
5. Enablement: initiates support and assists in the implementation of the idea or solution
6. Tenacity: commits to ensuring that the idea or solution gets completed and that desired results are achieved

If I Were Ben

Let’s pretend Ben and I have the same Working Geniuses and Working Frustrations.

Working Geniuses: Enablement and Discernment

Working Frustrations: Galvanizing and Invention

Imagine the difference in your conversation with Ben if you could go into the discussion with this background information and say:

“Ben, after reviewing your Working Genius Assessment report, I noticed something that might explain why you aren’t yet performing like I believe you can.

I’ve been asking you to spend almost all of your time being the cheerleader for the Simpson project and coming up with new ideas for the next initiative.

But what our business really needs right now is someone to make sure the plan for the Simpson work is sound and we’re not missing anything.

What your Working Genius report made me see is that you’ve mostly been doing work that’s naturally frustrating to you since we hired you.

And, I haven’t given you very many tasks that you enjoy and fulfill you. If that’s the case, it’s no wonder you’re not thriving and flourishing yet.

What do you think, Ben? Do you think this might help us better understand the situation we’re in?

In my experience, a “courageous conversation” using a person’s Working Genius Assessment requires far less courage.

These discussions using the Working Geniuses and Working Frustrations language produce better results in less time.
And neither you nor your direct report have to carry unnecessary emotional weight – before, during, and after you meet.

What about the Danger of the Sunk Cost Fallacy Trap?

You may be thinking that my recommendation is setting you up to step directly into the sunk cost fallacy trap.

You could be right, but I really don’t think I’m leading you astray.

I strongly believe that this investment of a little bit of money and time for Ben to take the Working Genius assessment is a smart move.

Because you’ll be equipped to have an informed, authentic conversation with Ben.
As a result, you and Ben may avoid the headaches and heartaches that always go with changing people and jobs.

Even if he does end up leaving your company, he’ll know that you genuinely cared about helping him be successful by doing more of the work he was made to do.

An Offer to Help

That’s been my experience using the Working Genius framework when dealing with employees who aren’t meeting performance expectations.

It’s worked for me so I’m sharing it so you can try it if you think it will help you.

If you’d like to learn more about how the Six Types of Working Genius Model and how it might help you deal with the challenges you’re facing in your business, I’d be happy to talk with you.

Or, if you just want to use me as a sounding board for other issues you’re encountering as a business leader, let’s chat.

You can click here to schedule a 45-minute Complimentary Clarity Coaching Session™.

If you can’t find a time that works for you, let me know and I’ll do what I can to open up my schedule to match your availability.

Helping you lead with clarity and confidence,

Greg

P.S. In case you’re still wondering what Kiersten and I decided about our sunk costs and the Turnpike Troubadours concert, we decided to skip it and keep fixing the sheep fence. We’ve defined part of our rich life as not constantly rushing from one activity to another. And we got an unexpected bonus, we were able to sell our tickets!

P.P.S. Last week on LinkedIn I talked about:

Why Asking for Help is NOT a Sign of Weakness
The 6 Categories to Measure Clarity for Leaders and Teams
How Clarity Helps Teams Use Differences Not Eliminate Them
The Actual Root Cause of “People Problems” (it’s not what you think)

If we’re not already connected on LinkedIn, just reply to this email with the word “LinkedIn,” and I’ll send you a connection request to save you some time.

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