Sunk Costs and Costly Decisions
Want to know why some people lose so frequently at poker? It’s not because they’re unlucky. It’s because they’ll often add chips to the pot generously during the early bets while they’re figuring out if they have a good enough hand to play… but by the time they realize they DON’T have a good enough hand to play, they feel that they’ve paid so much already, they should keep playing just in case (even though the odds of winning are now largely stacked against them).
This happens in business, too. A business owner will invest in something (a tool, a piece of software, an employee, or a new asset, just to name a few) in order to help their business. Things go well for a while, but sooner or later that thing is no longer useful, but the entrepreneur keeps using it because they feel that they’ve paid for it so they should try to derive as much value as they can out of it.
Although it’s a common practice, it’s a mistake… and it’s often a costly one.
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