Original subtitles

- Hi, I’m William Lidwell

and this is “Universal Principles of Design.”

In this movie: “The Sunk Cost Effect:

“The Power of Knowing When to Quit.”

The Concorde SST was a supersonic jet airliner

capable of getting you from London to New York

in just around three hours.

The plane was a technological marvel.

One of only two commercial supersonic aircraft

ever to enter service.

Its top speed of over Mach 2

rivals the fastest fighter aircraft of today.

Economically speaking, however,

the plane was a disaster.

Despite this, the British and French governments

funded development of the Concorde

long after they knew it would be a business failure.

The question is why.

After more than 30 years and a billion pounds in development

and then more than 23 million pounds per plane,

that’s about 125 million in today’s pounds,

they had invested too much to quit.

It took an unrelated accident on July 25th, 2000

killing all 100 passengers onboard

to give the stakeholders involved

the disruption and political cover they needed

to begin nudging the SST program toward retirement,

which occurred in 2003.

Why did the British and French governments

throw good money after bad for more than 30 years?

The answer in short

is the sunk cost effect.

The sunk cost effect is the tendency to continue investing

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.

Rationally speaking past investments,

or sunk costs, should not influence decision making.

Only the cost-benefits of current options

should influence decisions.

But of course, people are not always rational.

They let past investments influence

future investment decisions all the time.

And this applies to everything:

design, project management,

policy making, and daily life.

A few examples:

your firm begins doing research

on a new online product.

After a year of research and product development

and right before you’re ready to go to market,

Google begins offering a similar product for free.

There is no realistic way you can compete.

Your firm goes to market with the product anyway.

In 2005, President George W. Bush

said the nation had lost 1,864 members

of our armed forces in Operation Iraqi Freedom,

and 223 in Operation Enduring Freedom in Afghanistan.

We, quote, “owe them something.

“We will finish the task that they gave their lives for.”

This is classic sunk cost effect

and it has led to the loss of thousands of more lives.

And not to pick on Bush here;

every U.S. President residing over a war

has made similar remarks.

One more: you buy a nonrefundable ticket to a show.

You decide you no longer want to go to the show,

but you go anyway because you paid for it.

All of these are decision errors

due to the sunk cost effect.

People are susceptible to 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.

We have all heard the idiom, “Winners never quit,

“and quitters never win.”

Well, it turns out this isn’t true at all.

Sometimes the only way to win

is to quit.

So how can we avoid errors due to sunk cost effects?

Normally, recognition is the first step to recovery.

However, experiments looking at sunk cost errors

give little reason for hope.

Students who have studied the effect in economics

and psychology courses are just as susceptible

to the effect as students who’ve never heard of it.

That’s not to say that the effect can’t be overcome,

but it is to say that it’s a very strong, pernicious bias.

For me one of the best ways to guard against

the effect is to listen for its telltale phrases.

Phrases like, “We have too much invested to quit.”

“We owe it to those who have sacrificed to stay the course.”

“We can’t quit now after all we’ve put into this.”

When you hear phrases like these

alarm bells should go off in your head.

Odds are sunk cost effects are at play

and mistakes are being made.

It’s time to forget the past

and focus on current cost-benefits only.

And lastly, I think the Concorde example is telling.

Often times a significant negative emotional event

is required to disrupt the sunk-cost tendency

and force people to reevaluate the cost-benefits

of their decisions, as it did in the case

of the Concorde accident.

Accordingly, when such events occur

they should be used as opportunities

for reflection and reconsideration.

So whether you use your knowledge of sunk cost effects

to make better product development decisions,

to know when to end investments in initiatives

with no realistic prospects of success,

or to help guide difficult, controversial policy decisions

like ending wars, remember: there is great power

in knowing when to quit.