Bias of the sunk cost fallacy in entrepreneurship

Surely one of the biases that more companies has led to failure, it is about the phenomenon that leads us to justify continuing to invest and devote time and resources to something just because we have already invested a lot in it, regardless of whether or not it really makes sense.

The sunk cost is a term that comes from the world of economics, and it means the not being able to understand that these costs in time and money are actually worth zero right now, and that, should not be part of your decision-making criteria.

This bias or misunderstanding is the one that leads us to not pivot in time or to make excuses only for what we have already invested in the decision, instead of assuming that what we have already invested is worth zero if it does not move us in the right direction.

The fallacies are cognitive biases, through those who reality is disguised in a veiled way, giving an appearance of verisimilitude to what is in its essence uncertain or outright false. Almost everyone has incurred them at one time or another, and/or has been "victimised" by someone at least at some point in their lives.

Most fallacies mislead third parties, but also, some only distort the truth of the speaker, to the extent that they impair his or her ability to make sound decisions in a problematic situation.

In this TIP we will elaborate on the sunk cost fallacy. concorde (in homage to an aircraft created by the French government and which caused huge losses for France), which has been the subject of much research into how it can condition the fate of those who fall into its nets.

Basic principles of the sunk cost fallacy:

The sunk cost fallacy is perhaps one of the most common cognitive biases in the life of every human being. It is also known to have, on multiple occasions, a very serious consequences for the offender (as well as for his or her immediate environment). The convergence between its frequency and its potential for harm makes it an object of great interest to psychology, logic and even economics. And, it is that, Even if we insist on believing otherwise, sometimes our decisions are far from rational and rational.

Sunk cost is understood to be any cost that investment that, by objective circumstances, seems absolutely irretrievable.

Such an investment can be understood in temporal terms, as a major outlay or as the satisfaction of what was once perceived as a basic need for happiness and/or self-fulfilment. It thus includes any relevant past effort for which any expectation of return, cushioning or compensation has been diluted.

It is also known that the appreciation for what you have invested in (it could be a work project, a couple relationship, etc.) is directly related to the proportional to the amount of personal effort required, in terms of emotional attachment or outcome expectations. And, in turn, it is well known that the more attachment one has to anything, the more difficult it becomes to to let go of it or abandon efforts to keep it afloat. All that is reviewed here is the foundation on which the cost fallacy is built. sunk (or sunk cost fallacy).

The main problem of this fallacy lies in the decision-making processes The person or project to which our past efforts are attached is involved, sometimes titanic and constant. Although there is no option of recovering the investment they made, we continue to keep the past in mind when considering alternatives for change for the present, We often refuse to lose everything that once cost, or to liquidate the expectations that once motivated us to undertake what we would now leave behind.

With the incorporation of the loss, located in the past and completely irrecoverable, the decision-making process is conditioned by elements alien to rationality (understood as the weighed analysis of the potential benefits and disadvantages in both the short and long term). Thus, no positive-oriented choices would be made (a better job, a happier relationship or simply the cessation of some financial haemorrhage), but the ultimate purpose will be to avoid something for which it is certainly too late.

The consequences of this fallacy may actually be dramatic, and are often found at the on the basis of personal failures and economic setbacks. In fact, it is a concept that economics has rescued to understand what lies behind the losses of its clients' wealth. Here's how it works, We will see how it can lead people to act, and why it often leads to situations that only deepen the problem.

The sunk cost fallacy is a cognitive bias that places a value on a past, and clearly irrecoverable, significant personal investment in order to keep afloat a project whose prospects are very bleak. Thus, the effort would be maintained because of the expectation of recovering what has been delivered (money, time, etc.) without realising that it is really something that will never come back. In short, a refusal to give in to a threatening reality because of the fear of loss, and that may end up worsening the situation seriously.

Most of us have experienced first-hand the difficulty of giving up, to give up on something even though we are aware that it is a lost cause. This is, in fact, a harmful way of insist; who hopes that a stroke of luck (or hitting the right key) will diametrically turn the situation around and Let us be able to steer our course in an ocean whose swell threatens to sink us beneath its unfathomable depths.

The sunk cost fallacy is a bias that prevents us from letting go of the past because of our emotional attachment to it, even though it has no resonance for the present. Often implies maintaining all efforts towards something that no longer brings us happiness. This happens because we become victims of an irresolvable dissonance: "I have invested a lot, everything I had, in this... I cannot abandon it now, because it has not yet brought me anything good".

Some mental health problems form around this fallacy, especially the pathological gambling. In these cases, the behaviours that are carried out (gambling, gambling on a slot machine, etc.) They generate losses and interpersonal conflicts of immeasurable magnitude, but the person concerned keeps up the habit because they have already "lost too much" and cannot afford to "give up their effort", without first having recovered at least a little of their investment. Obviously, the consequence is that the problem is becoming more and more difficult to predict, This is known as "chasing" (asking for money from acquaintances in order to recover from losses).

Furthermore, it has been described that this fallacy It also affects us when the person making the effort is someone we admire or love. Thus, if a person we hold in high esteem asks us to do something and we don't feel like doing it, most of us will tend to give in and do it. (in compensation for someone else's investment, not their own). This is a familiar experience for a very significant percentage of the general population, and it implies the extension of this sunk cost fallacy to the social dimensions.

In order to clarify how this fallacy or bias is expressed, we will look at some concrete examples of the different forms it can take according to what has been referred to above.

• A ruined project

Philip was young, and as a young man, he was burning with the desire to carve out a future in which he could live to the full. For many years he combined a job (weekend) with his training, saving as much as possible to build his own business one day. No sooner had he laid his hands on that hard-earned diploma than he was already fantasising about the life he had always wanted for himself, building castles in the air about what his days would be like from then on.

Regrettably, Philip still He was unaware that despite all his enthusiasm, his project was going to be a failure that would lead him to lose everything he had saved during his youth. More than a year had passed, and his restaurant's losses were mounting wildly, with no sign that the situation would change. Nevertheless, he had invested too much in the opening, decided to ask some people he trusted for money in the hope of getting back on his feet in the future.

• Where are we going?

Vanessa and Miguel had been together for ten years, and in that time they had been through all sorts of things. Lying on a cold bed, appreciating the darkness seeping into the ceiling of the room, she meditated on her life with him.

The first few years were perhaps the most difficult, as her family did not accept the man she had chosen as her partner, and she fought against all odds to stay by his side in the worst of all possible scenarios.

Despite this, remembers that period as an adventure in which he learned a lot about what life was really about.

The sound of crickets reached her ears, in that night that seemed to go on forever. And she no longer loved him, I hadn't really felt the same way for at least five years. He hoped that the morning light would bring the strength he needed to articulate the words that would take them to the end of their shared road.

It no longer made him happy, but refused to believe that a story like his would die in such a mundane and sad way. They had spent so much time together... she was a jumble of doubts. Just another night, like so many others before.

• A bad-looking cake

It was a Sunday afternoon. As at other times in the past, Grandma Carlota brought what was once a fantastic carrot cake for dessert. It was not for nothing that it was a woman who had become well known for a recipe whose birth dated back to times that only she could remember.

And, it is that, The years were beginning to accumulate in his snowy hair, and he was unfortunately entering the winter of his life. But at that moment, in the light of a dying autumn afternoon, ehe family ritual was about to begin. It was the only important thing.

The smile on his face was just as it had always been, as was the theatrical gesture with which he displayed his lofty creation. On that day, however, lhat everyone expected with unbridled anticipation turned out to be the most unexpected of horrors: It was not grandma's cake, but a shapeless, unhealthy-looking mass, emitting a strange smell that immediately made the dog run away in pitiful sobs of panic.

Silence fell. Everyone looked at each other first, and at Grandma right after, with her smile on her face. Her usual smile. "How good it looks!" lied someone somewhere. With trembling hands and hearts pounding, fearing that it was "poisonous", everyone gulped down the usual generous ration.

And, it is the woman, who always gave his all and who had got up early to prepare the meal with love, deserved it very much.

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