One important attribute of any successful entrepreneur or business owner is knowing when to enter a new line of business or invest in equipment or employees to bolster an existing, growing service line. Another (perhaps even more important) attribute is knowing when to stop spending time, money and effort on a venture that will likely never work out or is not proceeding as planned. These two decision points—when to move forward and when to make a strategic retreat—are central to the success of any venture.
It is extremely hard to walk away from a project in which an executive is personally and financially invested. But the future viability of the organization always requires clear thinking, with all sentimentality, preconceptions, and vested interests cast aside. This inability or refusal to make a sensible, financial, and analytics-driven decision after a significant investment has been made in a project or an idea is known as the “sunk-cost fallacy.” As one textbook puts it:
“The sunk cost fallacy is the view that sunk costs should matter. Whenever issues involving sunk costs arise, it is always seems natural to think that it would be a pity to waste all the money that has been spent already. But that natural tendency does not lead to the best decisions. . . .”[i]