3 Tips for Avoiding the Sunk Cost Fallacy
When you pay for something, of course, it’s important to get your money’s worth. However, in business, there’s a point when “getting your money’s worth” stops making sense. For example, a business invests in software with the expectation that it will help improve efficiency, when in fact, it complicates things. Unfortunately, the cost of the software probably isn’t recoupable – which makes it a sunk cost. Although it can be tempting to invest more money into the software to make it work, doing so can cause your business to fall victim to the sunk cost fallacy.
The sunk cost fallacy is a mistake in reasoning when sunk costs – rather than new possibilities – are considered when making decisions. If you’ve ever sat through a bad movie because you didn’t want to “waste” money on the ticket, you’ve fallen victim to the sunk cost fallacy. However, this mistake in judgment can waste more than a few hours when it involves making a business decision.
How to Avoid the Sunk Cost Fallacy
Regularly Review Business Strategies
Business strategies aren’t “set it and forget it.” It’s important to review each strategies’ effectiveness regularly to ensure they are working properly. If something is not working, don’t be afraid to make a change. Just make sure your strategies are looking to the future and not stuck in the past.
Analyze Questionable Strategies
If a business strategy isn’t working, it’s not only ineffective, it’s draining your business’s resources. Therefore, you’re not just wasting money on ineffective strategies, you’re sacrificing potential gains that could result from investing in a different approach.
Recognize the Value of Losses
Finally, sometimes in business understanding what doesn’t work is as valuable as discovering what does. New ideas, geared toward the future are essential to the financial health of any business. In fact, some business even use these opportunities to work with outside consulting services and get a fresh perspective.
Novalinxs Expense Reduction Consultants are a team of financial professionals that care about the financial health of your business. Contact our team today and learn how our team can help reduce operating costs by streamlining processes for your business.