How To Build A Resilient Business in 2023: Defying the Sunk Cost Fallacy of Self Justification

In the constantly evolving business world, there’s very little room for leaders to get stuck in the past, yet it happens far more often than we think. Innovation is developing rapidly and shows no signs of slowing down anytime soon. 

Of course, by understanding the past, we can learn to avoid making similar mistakes in the future, but as historian and political scientist Daniele Ganser stated, “The past doesn’t repeat itself, but human decisions do.” As shocking as it may be, we are all imperfect beings with unfounded biases, false beliefs, and skewed perceptions of the world that allow us to justify our perspectives. And high-level business leaders aren’t exempt from these simple yet fundamental truths either. 

Many business executives and C-suite professionals fall victim to the sunk cost fallacy, a hidden cognitive bias that has the potential to stifle growth and limit future success. Falling prey to the sunk cost fallacy can trigger crippling effects across your company’s portfolio, financial balance sheet, and company culture. More importantly, it can also halt innovation and put your company down a path of making repeated mental errors and decisions to justify your position, even in the face of evidence that refutes it. 

This article challenges the status quo of the business world’s thought processes of experience always trumping evidence. It also offers business professionals, CEOs, and presidents actionable insights to defy the sunk cost fallacy and build a resilient, forward-thinking business in 2023. To be successful in today’s world of constant change, thought leaders must unlock the door to innovative intelligence and break free from the constraints of the past.

What is the Sunk Cost Fallacy?

The sunk cost fallacy refers to decision-maker’s tendency to base their choices on irrecoverable investments of time, money, or resources. It is the belief that because a significant amount has already been spent, it must not go to waste. And it’s not just about money, as the sunk cost fallacy can hold for decisions made about personnel, product roadmaps, MVP’s, and structuring the people side of the company. 

This way of thinking can trap business professionals in a cycle of pouring more resources into projects or strategies that are no longer viable. By recognizing and overcoming the sunk cost fallacy, businesses can embrace change, adapt to new circumstances, and foster innovation.

At the end of the day, the sunk cost fallacy is a form of self-justification. And while it can temporarily psychologically benefit us by reducing dissonance in our decisions to help us preserve beliefs, confidence, self-esteem, and well-being, it can also cause significant harm.

 These self-justifications can also cause us to pursue courses of action to protect our ego and the decisions we’ve already made, essentially justifying why we made that decision, even if it was a bad one. It takes away our ability to think critically and evaluate our thought processes due to our inherent biases about our decisions. 

The scariest type of thinking in business can be whittled down to the saying, “We’ve always done it this way.” 

Why? 

Because that type of self-justification puts up our blinders to potential opportunities that might be richer and lead to better outcomes, especially when confronted with irrefutable evidence and data. 

And although we may all start our journey being fallible, that doesn’t mean we need to end it that way. By being aware of the sunk cost fallacy and creating an action plan to avoid its seductive tendencies, we can begin to piece together our company’s road map moving forward to be better because of its presence. 

Signs You’re Stuck in the Sunk Cost Fallacy

Identifying the sunk cost fallacy in your decision-making process can be challenging, but that doesn’t mean it’s impossible. 

Internal audits (of all sorts, not just financial) are a great place to start, predominantly when a company continuously invests in a project despite diminishing returns. This might look like leadership having the reluctance to abandon an existing strategy or pivot to a new approach, which could be perceived as “giving up” or “wasting resources.” 

The struggle is real as we start overvaluing past investments, even when they’re no longer relevant to our company’s road map or financial plan. 

A great example of this comes from a highly regarded field of study: Medicine. 

Medical professionals, statistically speaking, have been indoctrinated into a culture that refuses to acknowledge mistakes or errors. In medicine, it is expected that the longer a provider has been in practice, the fewer mistakes they make. And while this does carry weight, what studies continue to find is that because of the sunk cost fallacy and self-justification that occurs when errors are made, providers never own up to them. 

When providers don’t own up to them, the opportunity to learn from those errors and never repeat them is eliminated. The blanket-over-the-head mentality causes far more harm than good and hurts far more people than it benefits. 

Case in point: In the United States, medical-induced errors are the third leading cause of severe injury and death. It’s a difficult statistic to wrap your head around, but time and time again, it continues to happen. 

Doctors worry that admitting their medical errors will cause a rise in malpractice cases, but the data doesn’t back this up. Interestingly, the more often providers or medical staff admit to making errors, the less often they get sued and taken to court by patients. More importantly, outcomes improve when mistakes are admitted and changes are implemented to correct the errors. 

Richard A. Friedman said it best, “In the end, most patients will forgive their doctor for an error of the head, but rarely for one of the heart.” 

The same is true in business, leadership, and professional relationships. By admitting that an error or mistake was made, we can learn from it and make the necessary changes to improve our systems. And in doing so, innovation and better decision-making can reign throughout our business. 

The Key to Overcoming the Sunk Cost Fallacy

Embracing change is crucial for business professionals looking to defy the sunk cost fallacy. In a fast-paced, highly competitive environment, it’s essential to keep an open mind and be willing to adapt. But, more importantly, it needs to start at the top with the highest levels of leadership. 

If you genuinely want to build a resilient business in 2023, it’s essential to encourage a culture of learning and experimentation and emphasize the importance of agile thinking and adaptability in decision-making situations. Your people must be rewarded for taking calculated risks to drive innovation and acquire knowledge. 

So how do we do this? By regularly reassessing your strategies and goals to ensure they align with current market conditions. 

As we’ve already seen, markets shift quickly, especially in a bear market like we’re currently experiencing. Titans will fall if they don’t adapt to the rapidly changing landscape. It’s the mania of 2008-2009 all over again but in a completely different social, political, and financial situation disguised as a trojan horse of high inflation and economic uncertainty. 

By creating an environment that values change and innovation, businesses can break free from the constraints of the sunk cost fallacy and drive growth for years to come. And the companies that choose to defy the sunk cost fallacy and overcome their fears of being wrong will win the long-term game of continued expansion and profitability. 

This is especially true during the dire times we’re living in, as the era of easy money is no longer here. Businesses that own this innovative edge during the hard times will get to ride the wave during the good times ahead, whenever that happens. 

Building Business Resilience by Leverage Data-Driven Decision Making

Data-driven decision-making can be a powerful tool for overcoming the sunk cost fallacy, but only if business leaders are willing to admit when they’re wrong. By relying on objective information and analysis, business professionals can make more informed choices and avoid falling victim to cognitive biases. And yet, this is far easier said than done. 

Organizations that want to defy the sunk cost fallacy must invest in analytics tools and technologies that empower team members to make data-driven decisions. It’s the classic Toyota Production System (TPS) scaled throughout your organization, equipped with the understanding of how neuroscience plays a role in our decision-making psychology. 

With that being said, it’s essential to establish Key Performance Indicators (KPIs) to measure progress and success along the way. That way, you can use data to identify trends, opportunities, and threats, and adapt your strategies accordingly, all while limiting personal bias and false beliefs. 

Companies must prioritize training their colleagues and employees in data literacy and analysis skills to help them make quick decisions and solve problems early. Doing so will eliminate most issues that usually make their way to the top, improving overall efficiency, performance, and productivity. More importantly, it will free up bandwidth for leadership to focus on high-level decision-making. 

By leveraging data-driven decision-making, businesses can avoid getting stuck in the past and focus on the future.

Building A Resilient Business in 2023 Isn’t Easy, But It’s 100% Possible

As a business leader, it’s your responsibility to take ownership of your actions and keep your team members honest in their pursuits. Building a resilient business isn’t easy, and as time has shown, it rarely happens by mere chance of luck. But that doesn’t mean it’s impossible to create success. 

As Mark Twain elegantly put it, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” 

Challenging your assumptions is a crucial aspect of overcoming the sunk cost fallacy. Often, business professionals become attached to their ideas and beliefs, making it difficult to let go of past investments. To foster innovative thinking, it’s essential to question your assumptions and be open to new perspectives. 

Although this is far easier said than done, actions speak louder than words. And the only way to genuinely defy the sunk cost fallacy is by taking massive action. 

For those who choose the road less traveled, prosperity and growth are inevitable. 

Written by Dr. Erik Reis.
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