It’s 9:40pm on a Friday night, you’re an hour into a 90 minute movie you wished you never started in the first place, well, because you're over 25 years old and the movie sucks more than the soon-to-be released 2023 dyson vacuum. Regardless, you continue to invest the next half hour into finishing this train wreck of a movie, why? Because you just have to see if the protagonist will save the world? No, because you will see the first hour of your time as a waste if you don’t at least finish the movie, continuing to waste the next 30 minutes anyway. Ironic, right?
This concept is known as the sunk cost fallacy, a psychological phenomenon that a person doesn’t want to abandon something because of the investment they have already made, regardless if abandoning it would be more beneficial.
You’re probably thinking, “well that’s just silly, I’d just quit”. Oh really, Andrew? Ever started to eat an unpleasant meal but finished it regardless? Ever stuck around in a relationship even though you weren’t really that happy just because you’d already been with them for 6 years? Ever invested heavily into a crypto coin because “this one’s gonna take off, I swear” and held on until it was a bust? These are all occurrences in which the sunk cost fallacy is as clear as a midsummer night’s sky.
Behavioural science leader and professional discoverer of why humans make illogical choices, Richard Thaler, coined the term ‘sunk cost fallacy’ in 1980. He proposed the idea that a person who has paid for a product (being a physical good or intangible service) is likely to use it more than someone who did not pay. It was only a few years later psychologists Hal Arkes and Catherine Blumer looked to one up Thaler, suggesting the sunk cost fallacy applies to any form of investment, whether it be time, effort, or the dollar bill.
To prove their point, Arkes and Blum performed a variety of experiments. One of which required participants to answer a survey based on a hypothetical ski trip. The situation was simple; you paid $100 to go on a ski trip to Michigan, and then without realising also paid $50 to go on a ski trip to Wisconsin on the same weekend, silly goose! You’re also told the Wisconsin trip will be way more fun and it’s too late to return either of the tickets. Which trip do you go on?
Now, kicking back in your comfy chair you’re probably thinking as I am, “Well of course I’d go on the Wisconsin trip it’s going to be more fun!”, but to Arkes and Blum’s point, not everyone is as rational as you and I (shock, I know) - 54% of respondents said they’d go on the Michigan trip. The psychologists determined the justification for this was a greater initial investment, verifying the sunk cost fallacy (thank goodness for majority rules, right?!).
The good news is that in business and marketing, we can leverage this to boost our sales and build our brand. Apple is a prime example. It’s rare to find a person who has just one Apple product, usually there’s a combination of iPhone, Macbook, iWatch, Apple TV, Apple Music, Mac, and iPod Shuffle (people still have them, right?!). If they were asked why they don’t make the switch to Android, aside from losing their self-inflicted superiority complex, they will most likely say they have invested too heavily into the Apple ecosystem to leave now. This accumulation of prior investment is just one factor that keeps Apple customers attached to the brand, no matter how good Android technology is.
Essentially, if you leverage the sunk cost fallacy and encourage customers to make regular investments into your business, they will unknowingly increase their engagement with your brand.
Sounds great right?! Tapping into this psychological bias can provide a great benefit to your business. However, don’t be a fool to your own tricks. Many businesses will fall victim to this concept too, continually investing into strategies that are not effective purely because they have already made such a significant commitment. Rationally spending time and money is crucial as a business owner. If you have invested heavily into anything and notice a potentially better alternative, don’t fall down the rabbit hole that is the sunk cost fallacy, explore the alternative as it will most likely yield a greater return for your business, heart health, and mental sanity.
Let us do the thinking for you.