The sunk cost trap is a cognitive bias that leads us to believe that we have to keep investing in something as long as we have invested so much in the past, regardless of whether or not it is rational to do so. This trap can lead us to make bad decisions that can have far-reaching consequences. As leaders, it is important to be aware of this trap and how to avoid it. CEOs, Public Officials, and Investors are especially susceptible to the sunk cost trap because of the high-stakes nature of their jobs. They often invest large sums of money into projects with long timelines, and it can be very difficult to walk away from something that you have invested so much into. 

The Dangers of the Sunk Cost Trap

The sunk cost trap can cause us to make bad decisions that are not in our best interest. For example, a CEO may continue to invest money into a project even though it is clear that the project is failing because she has already invested so much money into it. Public Officials may continue to support a failing policy because they do not want to admit that they made a mistake. Investors may continue to invest in a failing business venture because they do not want to admit that they chose the wrong investment. 

Let’s say you’re a CEO who has been asked to invest $1 million in a new project. After careful consideration, you decide that the project is not a good investment and tabled the idea. However, your team continues to push for the project and reminds you of the $1 million already invested. As a result, you convince yourself that the sunk cost makes it too risky to walk away and you end up investing an additional $5 million dollars into the project in order to salvage the situation. In total, your company has just lost $6 million dollars on a project that was never going to succeed in the first place. 

This example illustrates how the sunk cost trap can cause even the best leaders to make suboptimal decisions. But why does this happen? There are two main reasons: 

1. We are loss-averse and hate feeling like we’ve wasted our time or resources; and 
2. We tend to overestimate the value of something we already own (this is known as the endowment effect). 

These two biases combine to create a perfect storm that can lead even the most level-headed leader astray. So how can you avoid falling into this trap? 

How To Avoid The Sunk Cost Trap 

There are four steps you can take to avoid falling into the sunk cost trap: 

1. Be aware of your own biases: We all have cognitive biases, but awareness is key. Once you’re aware of your own biases, you can start recognizing when they’re causing you to make suboptimal decisions. 
2. Take emotion out of the equation: Emotion cloud our judgement and prevents us from making logical decisions. When evaluating a decision, make sure to consider all of the facts and evidence objectively. 
3. Define what success looks like upfront: Before making any decision, have a clear understanding of what success looks like. This will help ensure that you’re making decisions based on facts and evidence rather than sunk costs.
4. Get input from others: When making important decisions, it’s always helpful to get input from others who may have a different perspective. This will help ensure that your decision is based on multiple viewpoints and not just your own biased opinion. By following these steps, you can avoid falling into the sunk cost trap and making suboptimal decisions for your organization.

The sunk cost trap is a dangerous cognitive bias that can cause us leaders to make bad decisions that are not in our best interest. We often stay in failing relationships, projects, or business ventures because we have invested so much time and energy into them, and we think that if we just keep going, we’ll eventually see a return on our investment. However, this is often not the case, and we end up missing out on better opportunities as a result. To avoid the sunk cost trap, leaders should be aware of its dangers and take steps to avoid it; such as periodically reviewing their projects/business ventures/policies, being willing to admit when something isn’t working out,and considering new opportunities/taking risks when appropriate. By avoiding the sunk cost trap, leaders can make better decisions for themselves and those they serve .

Omar’s Key Takeaways

• The sunk cost trap is a cognitive bias that leads us to believe that we have to keep investing in something as long as we have invested so much in the past, regardless of whether or not it is rational to do so.
• This trap can lead us to make bad decisions that can have far-reaching consequences. As leaders, it is important to be aware of this trap and how to avoid it. 
• CEOs, Public Officials, and Investors are especially susceptible to the sunk cost trap because of the high-stakes nature of their jobs. 
• There are four steps you can take to avoid falling into the sunk cost trap: Be aware of your own biases; take emotion out of the equation; define what success looks like upfront; get input from others.

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