“Well, we’re already 75% of the way through this project so we may as well see it through.”
“We already paid for it, so we might as well use it.”
“We just tried this once and it didn’t work, so we’re not about to try it again.”
Do any of those sound familiar? They’re all irrational decisions based on cognitive bias, which doesn’t necessarily mean they’re wrong. It just means the reasoning is flawed. I bring this up because I see it almost every week. I speak with businesses who are either in the middle of a failing project or have the scars from a recent failure. In many cases, those negative experiences prevent them from doing the right thing and it’s rooted in a very common cognitive bias called loss aversion.
Loss aversion could be stopping you from taking action to fully and effectively implement a complete inbound marketing program that will move your business forward.
The Sunk Costs Fallacy
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This irrational decision-making is called the sunk costs fallacy. It results from loss aversion, which refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. It commonly results in us “throwing good money after bad.”
But another way it affects us is to prevent us from taking corrective action. If we’ve already paid for keyword research that turned out to be worthless, for example, many people refuse to do it again because they’re focused on the money they lost. Even if you can demonstrate that spending the money will produce an ROI, loss aversion can prevent them taking action.
I also see it all to often with websites as well. They finish up the implementation of a new website, only to discover gaping holes in the marketing strategy that result in an ineffective site. But the fact that they already spent the money once prevents them from investing further in order to correct the problem.
The Endowment Effect
Loss aversion also leads to another bias called the endowment effect. This describes the tendency for people to place a higher value on a good that they own than on an identical good that they do not own. People will pay more to retain something they own than to obtain something owned by someone else—even when there is no cause for attachment, or even if the item was only obtained minutes ago. This is due to the fact that once you own the item, forgoing it feels like a loss. Sound familiar? Loss aversion tells us that we hate it when that happens.
This is a scarcity response built up throughout our evolution that caused us to hoard and protect our hard-fought winnings. In an environment ruled by scarcity, it makes sense because keeping your stuff is less expensive (which is to say, dangerous) than acquiring new stuff. But in a world of abundance where currencies mean transactions can be balanced, our evolutionary brains betray us. This can lead us to hold on to strategies, tactics, websites, vendors and any number of old habits we view as our “possessions.”
Heal Thyself
We all have these tendencies, but knowing about them is half of the battle. The next time you’re evaluating a project, if the numbers look right but your “gut” is telling you not to go for it, make sure it’s not because of one of these cognitive biases.
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