3 Sunk Cost Biases You Aren’t Even Aware Of

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3 Sunk Cost Biases You Aren’t Even Aware Of

Posted on November 7, 2018 by Danny Leffel

Sunk cost biases are everywhere, but sometimes they’re so subtle that you may not even be aware of them. They eat away at your finances like money vampires, draining your account while producing or returning nothing of value. When a sunk cost bias is uncovered, you have to address it and determine if it’s something you should try to make useful or just get rid of entirely. But how do you find them? Typically, they’re right under your nose and you just need to know how to recognize them for what they are. The following are some sunk cost biases you probably aren’t aware of but should be.

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1. Thinking That Employee Turnover Doesn’t Matter

Some industries have high employee turnover for various reasons. You might feel that the kind of employment you offer is suitable for laborers with skill sets that are easily replaceable because changing the working environment to retain employees is more money than it’s worth. The truth is, jobs like serving food require in-depth learning and training. It takes time for a new server to get up to speed with the job and perform well.

Meanwhile, the rest of the staff has to work harder to cover the gaps created by a lost employee which means paying more money to higher paid employees. You’re losing money every time you have to replace an employee. This is a prime example of a sunk cost bias and how it winds up costing you money instead of increasing your profitability. If employee turnover is an ongoing issue, it’s time to address what’s going on in the business to cause people to leave. The longer people work for you, the less effort you have to put into their management. If you’re in the restaurant business, regulars grow attached to their waiter or waitress and are more likely to return again and again which is ultimately beneficial to you.

2. It’s All About Where You Open Your Doors

Retailers and restaurants are at the mercy of a fickle public. One moment you’re the trendiest place in town, the next minute, no one’s walking in the door. Sometimes this happens because of an economic downturn, sometimes the demographic that made up the customer base has thinned out and left the area. In this situation, it’s not your product that’s caused people to leave so much as it’s other forces that came into play. Meanwhile, your location is starting to cost you money every month. You may not want to move due to loss aversion or the cost of moving is higher than you think it’s worth.

Eventually, you have to face the fact that the customers aren’t going to return and you won’t be able to keep the business open without digging into your own pocket. It’s painful to leave the location, but it’s even more painful to lose money because you refuse to acknowledge that the slow-down in business isn’t anything other than a short-term event. It’s better to cut the losses, identify where the customer base has moved to, and find a location to rent or lease in that area, then reopen the doors to welcome back your customers.

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3. Holding Onto Outdated Equipment

Equipment costs are expensive, and they’re one of the harder sunk costs to accept. A lot of equipment can be repaired and patched to keep operating past its intended life span. And if the equipment upgrades don’t offer much of an improvement in production, then it makes sense to hold on to the machinery and get your money’s worth out of them. Machinery can operate for years and keep turning out a consistent product time and again. But there comes a point of no return for equipment and replacement is inevitable, however, you may not think so, creating a sunk cost bias.

One of the issues with machinery is the fact that parts wear down and they become harder to find as the machines age. You start paying a lot of money to repair or replace those parts, and sometimes you wind up rebuilding large sections to keep the equipment operational. This makes sense when the machine does something that modern machines can’t replicate. It doesn’t make sense for more common machines to be rebuilt, especially when the total of all the repairs is greater than that of a new one. Repairing is fine, but only when there’s a reasonable return on the cost of repair.

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