Overcome the Sunk Cost Fallacy

This is episode 283 of the Empowered Team Podcast. Welcome to the Empowered Team Podcast, where we explore how to optimize your performance in career, sport, and life. And now, your host, executive coach, and life strategist, Kari Schneider. Welcome. Welcome to the Empowered Team Podcast. I am your host, Kari Schneider, and today we're going to talk about a topic that I think is going to prevent you from going down that rabbit hole in the future of regret. And today's topic is the Sunk Cost Fallacy. Why? Why did I come up with this topic, Sunk Cost Fallacy? Because we have spent a number of sessions in our Empowered Team Mastermind focusing on effective decision making. And one of the biases that I was researching when we went into this topic was this sunk cost fallacy. And I thought this would make a perfect podcast topic because it can help so many people from avoiding this continuation of a bad decision, this scenario that we get into where we're like, yeah, but I've put so much into it, and it's still going, and it's still not working out the way you want to, but we keep going because we've invested so much time, so much energy, so many of our resources. All right? So I look at this in my life, I look back, and I think of how many times I've done something like this. Because we all have. Why? Because we're emotional beings and we get attached. Psychologically attached, emotionally attached. We want to be right. There's so many reasons that we do it. So let's just dive in. Let's keep it clean and clear here. And the sunk cost fallacy, as a definition, occurs when individuals continue a venture or a project. It can even be a relationship or a friendship, primarily because they've already invested resources. When we say resources, we mean time, money, effort, emotion. These are all our resources into it, rather than because of its current value or future value. So pay attention to that part, because this part's really important. It's not because of what it is valued at now or valued at in the future that we keep taking action or deciding to still be involved or invest in this thing. It's because of what we believed in the past or what we've already done in the past. That's why we keep doing it. That's what the sunk cost fallacy is. I'm going to say this again. I'm going to read this definition. This is sunk cost fallacy occurs when individuals continue a venture or project primarily because they've already invested resources. So our time, our money, our Effort, I like to add, in our emotional or psychological attachment, that is resource into it, rather than because of its current or future value. So why does this happen? I'll tell you why this happens. This happens because we end up becoming emotionally invested. Now, do we want to be cold fish and creatures that are constantly detached from everything? No. Our life is led with our emotions in so many ways. Even the people who think they are only going by their head are still being led by emotions because they're thinking that they're rationalizing their decisions and they think they want the thing because of blank. Well, why do they want blank? They want blank because they're going to feel a certain way. So we're still all emotionally involved. So we do this because we have an emotional investment. But when we can see that we're emotionally invested in something, that's when we can make more appropriate decisions for the current scenario instead of continuing to be attached by this emotional investment in the past. So we have an emotional investment. We become invested in the emotions of how we feel about what we've already put in. So we might feel like, well, I have already. I'm gonna feel like I'm at a loss if I stop now. I'm gonna feel like I've messed up if I stop now. So we feel like what we've spent, we have a hard time letting go of what we have already put into the situation. So it happens because of emotional investment number two. We have this misguided justification. And what this means is that we are looking to want to be right. We want to justify our past decision. So we keep going, waiting for it to be right. Even when evidence keeps showing us that it's not going that direction, it's not beneficial, it's not going in the way we think. There's lots of evidence against. Now, I'm not telling you to give up on what you're going for because there's evidence against. Because I, I've been in business, I've raised children. There's lots of evidence against for a long time, in a lot of things. However, we want to see some level of progress. If we're not seeing some level of progress and we keep investing into something with our time, our energy, our efforts, our, our emotional, psychological space, then it's really not paying back to us. And usually we've made a decision to do something or invest in something because we want a return on investment. We want a relationship with a friend because that friend is there for us when we need them. We're not just constantly there for them for the entire duration of the friendship, then it's not really a friendship. It's not really a connection with two people. It's more like one person caregiving for another person. That's not the same as a friendship. Doesn't mean that one person doesn't caregive at some point or another. It just means that at some point it's not just a one way street. Fear of this is the third reason. Fear of misguided or sorry. Fear of wasted effort. This is where we are afraid that if we stop on the path that we're on that everything we've done will have been a waste. Everything we've, all the money we've put in, all the time we've spent, it's all going to be a waste if we stop now. If we keep going though, we rationalize in our own brains that if we keep going then it's not going to be a waste. And that's not true. That's just not true. So admitting that the resources have been wasted can be difficult, leading then to further investment in something that's not working. But when we go, well, wait a second. Yes, it hasn't worked and yes, I've put a lot in, but it's not necessarily a waste if it's allowed us to see that we made a poor decision and we can change the decision. So that's what makes it not a waste. All right, so the impact that it has on us for our own decisions is that it perpetuates poor decisions. When we keep rallying for and validating for the original decision that's going poorly, then we perpetuate poor decisions. And we don't want to do that. This is why we have this podcast. We want to support us making empowered choices, us being empowered in our own lives. And if we're perpetuating a poor decision, we're certainly not going to feel empowered. So we also have an impact on our resources. If we have low energy because we keep putting into something that's not working, if we've lost some of our money because we keep putting into something that's not working, or we're short on time because we keep doing that same thing, then guess what? We are not going to have the energy that we want for what really matters. Whether that is our family, whether that's another project, whether that's a different allocation of resources, we just don't have the energy or the finances to put into it because it's all going into this. So I really want to emphasize Those impacts of this perpetuating of the poor decisions and losing our own resources, because that can be the tipping point to have us see, hey, I'm not willing to go forward like this. I'm not willing to keep going like this. So I can think of instances in friendships where I had a friendship at one point that we began the friendship years and years ago with lots of laughter and lots of fun and you know, one on one get togethers, get togethers in other groups of people. And it was just so amazing. And over time, as distance kept us apart and there wasn't as much frequency in physically getting together or speaking on the phone, I started to realize is that we realized that we really had differences in our values as well. We didn't have as many of the same interests. In fact, there was a real significant divorce that this person was going through. And no matter how much I tried to support them, they were so committed to fighting this fight in a way that was just draining their energy. They just didn't seem like the person that I knew anymore. And it was costing them so much. They were so committed to this fight and this divorce. And eventually a tipping point came with a personal request that that friend made in my life that really affected me and my husband and, and I. And that drew the line for me when they made a request for something from my husband that I just was not going to be in line with. And that's what made me stop this investment in this friendship that was just not working. But I kept allowing it because they were my friend and because we'd had so many great experiences together and because wouldn't want that to, to lose all of that. Well, I don't lose any of those great memories. I don't lose what we had as a friendship. I just chose to not have that friendship any further because it wasn't working anymore. It just wasn't. It wasn't beneficial for both parties. And so the friendship just didn't go any further. Now I've discovered, and in exploring and researching this topic, I looked back on so many areas. Doesn't matter whether it was a car that I stuck with for way too long that I didn't like. I didn't even like it right after I bought it. Whether it was relationships that I was in, whether it was an investment, I invested in this one stock and I kept watching it go down and instead of selling it, I just kept watching it go down. Convinced that I put this much money in, it's going to come back. I made this decision so we've all done this, whether it's in financial investments, relationships, business decisions, but the sooner we can eat a bite of humble pie and go, okay, wait a second, I might have made a bad decision. The sooner we can do that, then we can course correct. But not only that, we can learn from what we've just, just made. The mistake on the lesson is the gold. The lesson is the best thing that we can possibly get from the scenario to prevent us from doing the same thing later on. We want the gold, but when we refuse to see the mistake, we can never gather the gold. We have to see the mistake in order to really harvest the gold of what we can learn from in that lesson. So what we want to do is really. I've got three steps for you, three steps. These are strategies to avoid the sunk cost fallacy. And I'm going to start with the third one first. And we're going to go to the top one because the number one is the most important. So number three is focusing on, instead of focusing on what you've invested in, change your focus. Tony Robbins always says where, where focus goes, energy flows. And when your focus goes towards the next opportunity instead of on what you've already invested, when your focus goes on the next opportunity, you, you start to see what could be available, you start to see the next opportunities, you start to see what's possible instead of what's happened. Instead of focusing on the past, you're focusing on, oh, wait a second, this is what can be salvaged. This is what is possible. This is what could come next. So we shift the focus from what's already been spent to what could be gained by buy alternative options. Now I'm going to go to number two because this next strategy is key in being able to do that. Number two is the regular objective reviews. Basically, it's a progress assessment. You're looking at your progress along the way. If you've made a decision on something and you want to see whether it was a great decision or not, check your progress, check the metrics, check how it's going. This progress report is one of the best things you can do to see what are our metrics, what's working, what's not working, and that can have you pivot or change your mind or not. Keep sinking the cost into what's gone on. And what we can do in this moment is use some emotional or psychological distance. We want to use a little bit of that. We want to look at the progress from the standpoint of neutral numbers. If you've got something you can measure in this scenario, then look at neutral numbers. If I even did this with a friendship, I could go, okay, let me think here. How many times did we get together? How many times was that a fulfilling experience when we got together? How many times did I initiate it when we had the time together, how many times did we plan something the next time? So even in a emotional or a relational kind of scenario, you can still look at something from some neutral numbers and look at the progress. That way you still want to add in, perhaps especially if it's a relationship scenario. Do we feel like we're closer? Do we feel like we're making progress? But if I'm looking at this from a business standpoint, I'm looking at, for instance, in my business, when I exited my business, my brick and mortar business, I exited selling an asset, selling a, A building at the time. But I was somewhat emotionally attached to it because I built my business in that city. So I started my business in a different city, built my business in London, Ontario. And then I had attachment to the clients that the business, everything that was going on within that B building. But then when I went to exit the business and sell the building, then I had to take this level of psychological distance and look at the numbers and just go, okay, let's see what this can do. And then if I go back to that strategy that I just mentioned, the step number three it is that I'm looking at the opportunity. Well, by selling this, by exiting this business, what could I transition to in my business? And it meant executive coaching and leadership coaching. And if I exit this business and sell this building, what could those assets be reallocated to? And that meant the, the project that you might know is Wickcliff Lodge, that I've been working on for the past three years. So it meant there's new opportunities. But the only way that I could have seen that without staying stuck into what the current investments were, by looking at the numbers, taking a step back from it, looking at the future opportunities. And then I could see, oh, okay, this is a legitimate progress report. And that look how much progress we've made. Now it's not going the way I really want to. And now what are these next opportunities? What are the numbers? And then I can make a great decision strategically, with neutrality and with understanding what my future wants are. And this is going to bring us to the number one. This is the number one strategy. And this is the most important. Predefine your exit criteria. Oh, my goodness. Predefine your exit criteria. I wish I had done this in so many scenarios. I wish I had done this in relationships in high school. I wish I had done this. You know, if you had said, wow, if my friend threw my textbooks out of my locker onto the floor, that would be an exit criteria for that friendship. The person who I thought was my best friend, if they threw my textbooks out of our locker that we shared together onto the floor, then that would have been the exit criteria. But I didn't know those things at the time. But here's the thing you do know. This is what you can't. You can't control other people's behaviors. You can't control the interest rates for the building. You can't control Covid happening. You can't control any of those things. But here's what you can control. It's the the alignment to your values. You can control what you want your values to be. You can decide exactly what you want your values to be. And that is what the pre exit criteria are. For me, if this doesn't align with my values anymore, with my financial values, with my family values, with my personal emotional values, with my values for growth or connection or adventure, if this doesn't align with my values, then it's an exit. And I do this with my clients. When I am looking at taking on a client, do does their mission align with the positive impact I want to have in the world? If their mission for what they do doesn't align with the positive impact I'm looking to have in the world, I won't work with that client. Period. Now, I've had to reassess this because sometimes in working with a client, what happens is that the client isn't following through on what they want their mission to be and I'm there to support them. But if they aren't following through with the things I'm coaching them on, then I have to do what we would do in any business. It's a performance evaluation. We do this with any employee. We do this with business metrics. We do this with weekly reports. It's a performance evaluation. And if there's one thing I know with working with the top performers in the entire world is that there has to be some level of measurement. It could be as simple as ones and zeros. Is the action happening or not? Yes or no? It could be simple as a five point scale, an analog scale, zero being it didn't happen at all. A five being it happened in the most excellent fashion. A three being it's mediocre. You could measure these things. But one way or another, we measure performance. And if I'm not aligned with something that's happening, then that is exit criteria. That's a one or a zero. I'm not aligned with this, with my values. This thing doesn't align with my values, then that's exit criteria. Now I can evaluate it and go, okay, what's the cost of this exit? Do I really want to exit this? Or does some adjustment need to be made? And this is the progress because you may not want to completely exit yet, but if you see that it's not going in the direction that you anticipated, or you see it's not going in the direction that you want, it may still be worth going forward, but not in the same fashion. And that's where the decision gets adjusted. Maybe there was a mistake on the decision, but the decision needs to be made, needs to be adjusted. So you don't want to keep sinking in your time, energy and resources for an old decision. And your progress allows you to see whether you need to adjust. And your pre exit decision, your criteria allow you to know whether you're completely off the mark or whether you're still on track. So I'm going to review those again, but in the order that's the most priority. Because I went backwards. I went 3, 2, 1, and now I'm going to go 1, 2, 3. So number one, the most important thing to avoid your sunk cost fallacy, to keep you on track with your decisions to have you get to the outcomes you want. The number one is to make sure that you have predefined exit criteria. And the easiest way to do that is to know your values. They meet your cr. Your values or they don't. That can be your criteria. They meet your values or you don't. Now, if it's something more specific, have some numbers that surround that thing. Are they meeting this percentage of growth? Are they meeting these daily KPIs, are they meeting these weekly goals in the business performance, those can be fine too. But predefine your exit criteria. I will know that this isn't working when it's not aligned with my values, when they don't reach these numbers, when I don't reach these numbers, when the market doesn't reach these numbers, you predefine your exit criteria. So there's no question. It's not about making a wrong decision or being wrong. It's about, I made a decision, it didn't work. This is my exit criteria. That's when we exit, period. All right, so that's Number one, tie that in with your values so you know you're aligned and that's how it's going to feel good and know that you are taking aligned action. Number two is the progress report, the progress evaluation or analysis. Take a look at that. Take a little bit of psychological distance. Do the numbers. Look at the numbers not from right or wrong or good or bad, but rather from. Are they going in the direction that I decided they, they would go for me to stay on this path, period. So that's number two, your progress report. Number three is focusing on the opportunity that could be there if you weren't still sticking with this thing. So what is the opportunity if you weren't still stuck in this particular business investment, in this particular friendship, in this particular vehicle, Whatever it is, take a look at what is the opportunity if you weren't tied to this one. And for me, the example I gave you was if I exited my business and that was from the business side of things and the building side of things, the business exiting allowed me to focus on a new emphasis in business. The building exiting allowed me to have an asset to start on a new development on a different asset. So, so I could then see what the opportunities were and not be stuck on what I'd invested in in all of my business career for many years and invested in in a particular building for many years and a lot of money. So take a look at what the opportunity can be if you weren't, if you weren't fully invested in the current thing. All right. Oh, that's a juicy one. Because it has us faced our decisions, it has us face our mistakes, it has us face what the possibilities and opportunities are and it has us take a look at how that can all be aligned with our values. So I love this topic, this sunk cost fallacy. Don't let it hold you stuck. Don't let it blind you to what's possible. Don't let it have you remove the joy and empowerment torment from your life, hold you in poor decisions. Have that sunk cost fallacy. Be what it is. You sunk some things in and then let it go if that's what's required. Take a look at your strategies, your three steps and go and do it. Be empowered, be lit up with your decisions. You can do that when you're not all stuck in this sunk cost fallacy. Have a wonderful rest of the rest of your day. Go out there, be an empowered human, take care of yourself, take care of others, take purposeful action and be up to something that's greater than yourself. I'm loving on you. You've got this. Keep going. 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