The sunk cost trap, also called the sunk cost fallacy or bias, describes our tendency to irrationally follow through on an activity that is not meeting our expectations. You’ve probably heard the phrase “throw good money after bad”—that’s referring to the sunk cost trap. This trap may apply to actual money, time, or emotional effort.
The best example of the sunk cost trap is an automobile. When you buy a car, you’ll eventually have to put a certain amount of maintenance into the vehicle—and eventually bigger and more expensive things need to be fixed.
A few years back, I bought a car and put in the usual amount of maintenance in the form of oil changes, brake pads, and new tires. But new problems kept popping up. Then, a warning light came on, and I thought, “I really need to just start looking into getting another vehicle.” But then, in my head, all I could think about was how I just spent a wad of cash on those new tires. I don’t want to trash the car now.
The sunk cost trap is the feeling that I put so much money, time, or effort into this situation that I don’t want to let it go yet; I want to keep trying. I finally got rid of the car after it died and left me stranded. The whole situation was a hassle, but it taught me an important lesson: sometimes you just have to let it go.
The sunk cost trap happens in businesses too. Years back, I expanded my office and added a dual-use yoga and workshop space. I hustled for nearly three years to make the space cover its costs and make me a little money for my efforts. It was not fruitful.
I had the whole sunk cost trap conversation in my head. I thought about all the time and love I put into the expansion, as well as the cost of the physical construction and furnishings. It was really hard to reconcile myself to the reality that I would not get that money and time back. Over the course of six months, I discussed the issue with colleagues and friends. I was planning to give it a few more months of trying when I was presented with an opportunity to let go of the space under the best possible circumstances. So, I let it go.
Letting go turned out to be a wonderful decision. But why didn’t I do it sooner? I wasted months being stressed out and indecisive, spending time, energy, and money trying to make a failing venture thrive. You guessed it. I was caught in the sunk cost trap.
We’ve seen massage therapists do this with a logo or website design. They’re working with a designer. Maybe they’ve spent $1,000 so far on the project, and they know it’s not working out. Their designer is unresponsive and not providing quality work, but the business owner won’t just switch to somebody else because they don’t want to start over and “throw money away.” It happens with software, equipment, and even side gigs we don’t like. So how do we make good business decisions and avoid the sunk cost trap?
Consult your advisors. Talk to trusted colleagues and nonmassage business owners. It really helps to get an outside perspective from someone not invested in the situation.
Go back to the beginning. Ask yourself, “If I could go back in time to before I started this venture, would I choose to do this thing again?” If not, let it go. Cut your losses and move on.
Run the numbers. Will you be financially better or worse off six months from now if you make the decision to end this thing? Let the actual figures guide your decision. Keep in mind that sometimes a decision will temporarily impact you financially, but it’s the best thing for you holistically and emotionally.
Take note of how you feel. Is the situation dragging you down, creeping into your personal time, and generally diminishing your quality of life? Or does the challenge of working through this excite and motivate you? How you feel day to day matters deeply.
Note what you learned. Sometimes making a list of what you learned and who you met during a particular endeavor helps you feel less like the whole thing was a total failure. Every decision is a learning experience, and you’ll begin your next endeavor with more wisdom and practical skills.
Dream about making space. What will you be able to fit into your life and schedule once you walk away from this project? Where do you truly want to direct your time, energy, and resources? Remember, when we let go of one thing, we make space for new things to grow.
Learning to make better business decisions takes lots of practice, and recognizing the sunk cost trap is an important skill. By cultivating self-awareness, leaning on outside help, and getting comfortable examining our financial numbers, we can get better at breaking free from things that drag us down—leaving more room and energy for the things that bring us joy.
Allissa Haines and Michael Reynolds are found at massagebusinessblueprint.com, a member-based community designed to help you attract more clients, make more money, and improve your quality of life.