Tuesday, 29 September 2015

Sunk Cost Fallacy - By Dion Siluch

Sunk Cost Fallacy - by Dion Siluch

If you are unfamiliar with this term then you are about to learn a powerful tool. This first was explained to me by my friend James Konduc while I was working on my first successful business. I was developing the systems to my ambulance rental business and was exploring different solutions for doing online reservations similar to what current car rental companies were doing. I found a developer in India to start the project from scratch and quoted me $6,000. They wanted a third of the price upfront, a third in the middle and the last third upon delivery of the project. This is very typical of programmers especially overseas.

The problem I ran into was the quality of their project. To be frank it absolutely sucked. It was like they were using an excel spreadsheet online to create the entry points and had no idea how the system was supposed to work. We were 4 months into the development and I had paid these guys $4,000 of my hard earned money for their product that was maybe half of what I was looking for. My only thought process was “wow this is harder than I expected”. Working with developers to program something that I envisioned in my head was very difficult to communicate. It doesn’t look or feel the way I want it to and I had already invested $4,000 into the development. No wonder companies like Enterprise spent millions of dollars on their online programming and systems, how am I supposed to compete?

Then I found this useful website capterra.com. I decided to search for a program that might have already been built for what I was looking for. And it turns out there were dozens of them. All different types of rental software programs for every industry you could think of. Equipment rentals, car rentals, airplane rentals, limo rentals, boat rentals, even camera rentals. I found multiple price points and different fleet sizes that each program could handle.

I tried a demo with a promising fleet program and it turned out to be $800 all in. Well I could have used this info 4 months ago I thought. The next big hurtle was dropping the current project and buying into this one. But I had already invested $4,000 into this project and I didn’t want to lose my money…

The sunk cost fallacy theory goes like this, a sunk cost is any past cost that has already been paid and cannot be recovered. Therefore, any invested time, money or energy into a current project or person will create an emotional attachment to continue down the path until completion of that particular investment; even if the solution is less desirable.  

Here are some examples
I might as well keep eating because I already bought the food
I might as well keep watching this terrible movie because I’ve watched an hour of it already 
I might as well keep going to a bad/useless class that I paid for
I might as well continue dating someone bad for me because I’ve already invested so much in them

It’s easy to understand in hindsight that the decision was clear but the truth is we all get caught up in this phenomenon. I had to bite the bullet and cancel the India project short. It never feels good spending money on something that brings absolutely no value to your company. But the lesson was clear: STOP INVESTING MONEY IN SUNK COSTS