Written by 05:00 Decision-Making, Featured, How to, Linkinbio

How to avoid psychological traps: the sunk cost fallacy

Would it have been cheaper to build Berlin’s ghost airport new? We explain how past expenses adversely impact our decision making.

5
(1)

We got a strange summer behind us. Most of us will remember spending summer holidays in a different way – certainly with some restrictions and constraints that we never thought of. On the business side it has been extraordinary as well. The tourism and aviation industries have had a very challenging summer. The autumn does not look much brighter. It is difficult in this context to find anything positive to write about. However, these exceptional conditions are considered favorable for the opening of the new Berlin Brandenburg Airport, planned on October 31.

An airport without passengers

Berlin’s deserted ‘ghost’ airport became world famous for its delay. But now the low level of passengers might actually allow a smooth start. With the airlines recovering slowly over the next coming years, the modern airport should see the amount of passenger steadily increasing. One could almost think that this is an ideal timing for the launch of what should become one of the main airports in Germany with about 40 million passengers a year. That would be without considering that the airport was due to open 9 years ago.

Berlin Brandenburg Airport is currently used as parking for all airliners stranded due to the pandemic

How could that have happened in a country famous for its engineering and its efficiency? Well, there is not a single reason for such a delay, but several. When supposed to open in 2012 (after a first delay), there were numerous construction flaws in the fire protection system, the escalators and the cabling, as well as a shortage of check-in desks. What started from that point in time was the ‘let’s fix it’ phase.

Each team was focusing on fixing the technical deficiencies individually to make sure each system works as planned. It required huge effort and resulted not only in several subsequent delays, but also in several changes in the management. Furthermore it uncovered several governance issues, but that is not the point here.

The Sunk Cost Fallacy

It seems (from the outside and with hindsight) that at no time the management team took a time-out to think about what is the best way to reach the final objective, namely having an airport able to accommodate millions of passengers a year. Maybe, it would have been cheaper and faster to tear down the entire construction and start again building from scratch a simpler, less hi-tech, terminal. Instead, the project management team focused on restoring the various systems to have them working as soon as possible. That made sense when considering how much money had already been invested in planning and execution.

This amount of budget already spent (or lost) is sometimes called sunk cost. In theory, since the money is gone and cannot be recovered, it should not influence our future decisions. In reality, people try to invest further in order to confirm that the initial investment was right. Research explains it by our natural aversion to loss.

For example, I remember the dilemma of bringing my old car to the garage to get it fixed – once again. It was troublesome as on a regular basis few things broke or stopped working. On the other hand, I could have just gotten rid of it to buy a new one. From a rational economic analysis, the second option appeared to be the best. However in the back of my mind, it was still painful to admit that I had already brought the car too many times to the garage (see previous article how to deal with failure).

In business decision-making, this type of bias is known as the sunk cost fallacy. I recently found out that we could also call it the Concorde Fallacy, referring to another costly and tragic example in aviation. Basically the French and British governments kept funding the Concorde project for years although they knew there were no economic case for it.

Economists would point out that the sunk cost fallacy is irrational, and could be described as “throwing good money after bad“. Cambridge Dictionary

How to avoid the sunk cost fallacy?

Unfortunately, like for most of those cognitive biases, there are no magic solutions. There are rather a couple of tips that one can follow to avoid falling in those psychological traps:

  • Keep your plan adaptable. Be it a project or a strategy; try to plan some checkpoints at which you will reconsider whether you are on the right course to meet your objective or vision. The difficulty is to find the right time for these checks: too early might not be helpful (as you do not have enough experience or feedback), too late might get you more prone to the sunk cost fallacy.
  • Take a time-out. Especially when the stakes are high, take time to reflect with your team (or at least a sparring partner) on what is the final objective and whether keeping on the chosen path is still the best way to achieve it. Ask yourself and others the question whether you are actually experiencing a sunk cost fallacy.
  • Recognize the value of the money invested. True, your airport (or you car) might not be working, but you have learned something out of that experience. If as a company (or individual) you are able to effectively learn from it, you might be able to save a lot of money in the future.

In the next article, we will discover another type of bias similar to this one. And we will see how this could let the sorbet melt in an ice cream shop. Stay tuned and sign up to our newsletter to never miss an article.

For more information on large infrastructure projects in Germany, visit: https://www.hertie-school.org/en/infrastructure

We would love to hear your thoughts about this post and the following to come. It would be of great importance to us to learn what you would love to read more about, if you like our blog and would come back, and what you’d like us to write more about. Please take a moment to rate our post and discuss with us in the comments section below – or send us a private message. 

If you liked what you have read, please share this post and refer us to a friend. 

Share on email
Share on whatsapp
Share on telegram
Share on linkedin
Share on twitter
Share on facebook

Sign up to our weekly newsletter & never miss a post

How useful was this post?

Click on a star to rate it!

Average rating 5 / 5. Vote count: 1

No votes so far! Be the first to rate this post.

We are sorry that this post was not useful for you!

Help us improve this post!

Tell us how we can improve this post. What could we have done differently so that you'd have loved to read it?

Close
Do NOT follow this link or you will be banned from the site!