Sunk Co$t Effect in Product Design - Knowing when to quit.
What is the sunk cost effect?
A universal principle, also known as sunk cost fallacy is the tendency to continue to invest in an endeavor because of past investments of time, effort, or money in that endeavor, even when the payoff or return on investment is no longer available.
Past investments, or sunk costs, should not influence decision-making. Only the cost-benefits of current options should influence decisions.
In product design, management and key stakeholders can get too attached to an invested design and refuse to budge even after designers have expressed some concerns. Refusing to reevaluate a design can cause the rest of the product to suffer or worst fail. This can also lower the morale and motivation within the team and quickly becomes another “Let’s just get it out the door” kind of project.
Common Example:
Your company starts to do research on a new online product. After a year of research and product development, and right before you go to market, Google comes out with a similar product and offers it for free. There is no realistic way you can compete but management decides to go to market anyway.
“Those who cannot learn from history are doomed to repeat it.”
– George Santayana
The Concorde SST was a supersonic jet airliner, capable of getting you from London to New York in just around 3 hours. Its top speed rivals some of the fastest fighter aircrafts. Economically, the plane was a disaster. The British and French governments continued to fund the development of the Concorde long after they knew it would be a business failure. After 30 years and billions of pounds spent in development, they had spent too much to quit.
It took an unrelated accident on July 25, 2000, killing all 100 passengers on board to give the stakeholders involved the disruption and political cover they needed to nudge the project into retirement. Sometimes consequences or major negative events need to happen in order to disrupt the rabbit hole of the sunk cost effect and force people to re-evaluate their decisions. When events like these occur, they should be used as opportunities for reflection and reconsideration.
Science or Ego?
People are not always rational. They let past investments influence future investment decisions all the time. People are likely to make errors in situations like these because they fear failure more than they desire success and because they don’t want to feel or appear wasteful.
Even people who have the knowledge and have studied this effect in economics and psychology are still just as vulnerable to the effect as people who’ve never heard of it.
How to avoid the sunk cost effect:
Fortunately, more companies today are switching to agile methodologies that allow for an iterative design process but even agile teams today still fall victim to this effect and recognition is the first step to recovery.
A recommended best practice is to make sure to design in short iterations and get feedback as frequently and early as possible. This can avoid getting too attached to a design. Running frequent and early tests with prototypes without the sunk cost of a full-scale design implementation is also helpful. The more development that goes into the product, the less willing management will be to make the architectural changes that are needed after the design is exposed to real customers.
Phrases to be aware of:
- “We can’t go back now, after all we’ve put into this.”
- “We already got sign off.”
- “Dev has already started to build.”
- “We have too much invested to quit.”
- “We owe it to those who have sacrificed to stay the course.” We hear this one a lot during war time.
When you hear phrases like these, an alarm should go off in your head because odds are the sunk cost effect is at play and emotional decisions are being made. It’s time to forget the past and focus on current cost-benefits only.
If there is nothing you can do to recover yesterday’s cost, then you shouldn’t let it influence today’s thinking. We usually hear “Winners never quit and quitters never win” and this isn’t true at all. Sometimes the only way to win is to quit.
