The Trap of Sunk Cost
And The Steps To Avoid Getting Swallowed By It
The plan was straight-forward. Some could argue even foolproof. Reach the summit by 2:00 pm. Anything later and climbers needed to turnaround and head back to camp. 2:00 that was the cut off.
But for some, it wasn’t. A powerful force was at play and this force would contribute to the death of one of the climbers, Doug Hansen.
It’s May 1996 and the scene is the final ascent to the top of Everest. Three groups of climbers are all making their way to the summit. Doug Hansen is one in a group of American climbers hurling toward the top of the tallest mountain in the world.
This is Hansen’s second attempt to summit Everest. A year earlier he had tried and failed. Since that time he has given everything toward accomplishing his goal including working three jobs in order to afford the cost of the expedition.
Struggling throughout the climb, Hansen will eventually make it to the top, but it won’t be until 3:45 pm, nearly two-hours past the critical deadline.
Shortly after summiting, Hansen and expedition leader Rob Hall began to head back down to camp four. But by now, a powerful blizzard has sprung up out of nowhere. Hall became stuck near the top and froze to death. Hansen disappeared somewhere in the storm. His body was never recovered.
In its simplest terms Doug Hansen doomed himself by falling into the trap of the sunk cost. He had given over two years of his life, tens of thousands of dollars and countless hours to pursue the quest of reaching the “ceiling of the world.” These were his costs. And faced with the difficult decision to push on and somehow have things work out or turn back to possibly never having another shot at the top and forgoing the considerable investment of time and money, Hansen elected to press on.
Consider this line which another climber heading down heard from Doug as they passed:
“I’ve put too much of myself into this mountain to quit now.”
In the extreme conditions of Mt. Everest, it’s easy to understand how bad, sometimes terrible decisions get made. People are oxygen depleted, sleep deprived, malnourished and often dealing with horrific weather conditions. Surely under better conditions, people making business decisions wouldn’t fall prey to this kind of trap…right?
Sadly, that’s not the case.
The Everest expedition is a tragic but a powerful case study for understanding the force of sunk costs. But one does not need to journey to the top of the world to see this force in play. In my own professional experience, I’ve seen this first-hand more than one might expect. I’ve been in the room, where prospective clients have told me point blank, that my product is better, and they should move on, but they can’t because they have invested too much into their existing solution.
And not only have I witnessed this force…I have fallen into the trap. Early in the launch of my business I committed to personnel that I realized were not going to be the right fit. And instead of making the choice to move on…I over committed and continued on well beyond the point when we should have parted ways.
I bring this up because no matter where, the peak of Everest or a conference room in your city, the force can grab you firmly and lead you down the wrong path.
THE ABILITY TO “CUT YOUR LOSSES” REMAINS A DIFFICULT CHALLENGE AS WELL AS A HALLMARK OF COURAGEOUS LEADERSHIP.
— MICHAEL A. ROBERTO
Michael Roberto is a professor at Bryant University and has written on this topic. More recently, he was featured on the podcast Choiceology. Professor Roberto states that once we begin to frame a situation as loss aversion, this leads us to engage in more and more risky behavior as a way to course correct.
We have seen this play out before. Consider the gambler in movies and TV that continues to lose but refuses to leave the table. Instead of walking away, his bets turn more and more erratic, throwing more money at cards he would never chase with a better plan, as he attempts to make up for his losses.
So, How Can You Avoid The Sunk Cost Trap?
Roberto suggests four steps that can be taken avoid the trap.
One: Decide on an exit strategy. Conversation needs to happen about what to do when things start going south. So, set up milestones and be prepared to have the difficult conversation at the first sign things are not going according to plan.
Two: Who from outside of the organization can be used to provide advice and act as the devil’s advocate. We all get too fixated on the issue and can’t see the real issue or can’t let go of baggage that wouldn’t be important to someone from the outside.
Three: Don’t frame the conversation as a go/no. Putting a key decision in these terms inevitably leads to the wrong decision because it’s so much easier to stay the course vs. moving on. Instead, a conversation needs to happen around options that could happen. If X doesn’t happen then let’s look at Y.
Four: Individuals and organizations need to consider the opportunity costs. In other words what are they missing by staying with their current solution.
Number four, is perhaps, the most important factor to consider. For those in this situation, the lens of additional options narrows and people focus on the resources already without taking into account the broader picture — the money they are leaving on the table because they are not exploring better opportunities.
By considering some or all of these factors the next time a future project begins to go left can help you course correct, saving you countless hours and a truck load of dollars.
Let’s say your team has been working for a year on a new project, and two weeks before your (expensive) launch, someone comes out with a competitive product that’s better and cheaper, it means that it will cost you millions of dollars to fight your way to decent market share. Should you continue?
What if your team had only been working on it for a week?
Bottom Line: Past expenses have nothing to do with future economic decisions. Past profits have nothing to do with future decisions either. That’s not easy to embrace, but it’s true.
For more on the fatal 1996 expedition to the top of Mt. Everest, read Jon Krakauer’s Into Thin Air.
For more on decision making and how it relates to the disaster on Everest, here’s a link to Michael Roberto’s whitepaper.