The art of letting go
We humans tend to stay the course when we've invested in it, even when it's leading us nowhere.
Where there was something and suddenly isn’t,
an absence shouts, celebrates, leaves a space.
I begin again with the smallest numbers.
—Naomi Shihab Nye, from “Burning the Old Year”
Sometimes when we’ve made significant expenditures of effort, time, money, or emotion on something, we’re determined to see it through. “We’ve come this far,” we say to ourselves. “We must push forward.” But often that impulse keeps us on an unproductive path.
This is the challenge of “sunk costs,” investments already incurred that can’t be recovered. Humans – as well as mice and rats as it turns out (Swies et al 2018) – have a demonstrated bias to value previous investment when determining future action. We continue to wait for the elevator instead of taking the stairs because we’ve already waited so long. We stick with a faltering project because we’ve spent so much money and energy on it. We authorize a major building or renovation project despite growing evidence that it’s the wrong choice.
As one group of economists describes the sunk cost problem (Ronayne et al 2021):
It is a core lesson in many business economics or decision-making classes that any unrecoverable costs sunk in the past are irrelevant when deciding what to do next. Decision-makers need to remember: when sunk costs affect strategic decisions, there can be real and dire consequences.
Sunk costs are lost causes. The effort, time, money, or emotion is gone and can’t be recovered. What matters is how you invest the resources you currently hold toward the goal you have in mind.
So why is this such a common trap? Like most biases, the sunk cost fallacy is the result of DNA-deep evolutionary shortcuts or heuristics to conserve energy and reduce information overload (Knapp and Knapp 2012). But it’s also reinforced by our social need to “save face” or demonstrate a skewed vision of leadership (Bazerman and Neale 1992).
How do you avoid the trap? First, by knowing and naming it. Notice how you and your team are determining future action, and watch for ways you might be valuing past expense. As one example, if you’re drafting a comparative project budget, don’t include unrecoverable previous investment in the math. If you’re standing at a crossroads, consider the resources you have and not the ones you lost along the way.
In their study of sunk cost behavior, Ronayne et al discovered that wisdom (experience and stocks of knowledge) mattered more than smarts (raw computational ability) in avoiding or escaping the trap. So if you’re carrying the weight of past commitments into current decisions, make the wise choice and let it go.
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From the ArtsManaged Field Guide
Function of the Week: Finance
Finance involves designing, maintaining, and sustaining systems of money and stuff.
Framework of the Week: What? So What? Now What?
What? So What? Now What? offers a lightly structured process for reflective inquiry or difficult discussions. It encourages participants to first define/describe an idea, issue, or incident (What?), then connect it to relevant context or consequence (So What?), and finally consider options for future action (Now What?).
PHOTO by Grant Durr on Unsplash
Sources
Bazerman, Max, and Margaret Neale. “Nonrational Escalation of Commitment in Negotiation.” European Management Journal 10, no. 2 (June 1, 1992): 163–68. https://doi.org/10.1016/0263-2373(92)90064-B.
Knapp, Michael C., and Carol A. Knapp. “Cognitive Biases in Audit Engagements.” The CPA Journal (1975) 82, no. 6 (2012): 40-45.
Ronayne, David, Daniel Sgroi, and Anthony Tuckwell. “How Susceptible Are You to the Sunk Cost Fallacy?” Harvard Business Review, July 15, 2021. https://hbr.org/2021/07/how-susceptible-are-you-to-the-sunk-cost-fallacy.
Sweis, Brian M., Samantha V. Abram, Brandy J. Schmidt, Kelsey D. Seeland, 3rd MacDonald, Mark J. Thomas, and A. David Redish. “Sensitivity to ‘Sunk Costs’ in Mice, Rats, and Humans.” Science (American Association for the Advancement of Science) 361, no. 6398 (2018): 178–81. https://doi.org/10.1126/science.aar8644.