The Sunk Cost Fallacy is Ruining Your Decisions. Here are 3 Life-Changing Lessons I've Learned From Pivoting As entrepreneurs, it's our job to ignore the critics and determine when to stay the course and when to pivot fast.
By Rodger Desai •
Opinions expressed by Entrepreneur contributors are their own.
Imagine for a moment that you are on a hot air balloon anchored to the ground by a rope. As the hot air balloon pilot makes last-minute preparations a few yards away, you hear a SNAP and watch in terror as the balloon takes flight. With the ground disappearing below you, you have a difficult decision to make and need to make it fast. Do you cut your losses and jump off the hot air balloon now, resulting in a few broken bones, or do you stay "safely" entombed on the balloon as it soars higher and higher into the atmosphere?
Although you may never have stepped foot on a hot air balloon, you have certainly experienced the phenomenon of sunk cost fallacy. Sunk cost fallacy is when you stick with a failed venture because you can't muster the humility to admit you made a mistake, the courage to chart a new course or the strength to start again.
Sunk cost fallacy is not always a matter of life and death. It impacts small decisions (this baseball game is so boring, but the tickets were so pricey. Should I leave?) and big ones (I hate being a doctor. But medical school was so difficult. Should I change my career?). In the business context, sunk cost fallacy is something every entrepreneur must be on guard against, especially when deciding whether to pivot your company.
Related: Finding Success in Failure — 8 Lessons Learned from Failed Ventures
You don't need to hire an expensive consulting firm to know that pivoting, the act of shifting a company's strategy in a big way, is a huge risk. Even discussing it can feel dangerous. An unwise pivot can tank a business by confusing customers and scaring off investors. On the other hand, failing to pivot your company when appropriate will result in falling behind the competition and is equally dangerous.
Let's take the video rental chain Blockbuster, for instance. Although digitization was imminent, Blockbuster's leadership likely suffered to some extent from the sunk cost fallacy. Pivoting to a digital model where customers could order films from a website would mean recognizing that its previous investment in brick-and-mortar locations was a mistake. Blockbuster's failure to pivot to digital fast enough gave Netflix a critical in. Today, Netflix is valued at nearly $190 billion, and Blockbuster had gone out of business. Long story short: sunk cost fallacy can cause complacency in business leaders and destroy businesses as a result.
From inflation and changing market appetites to Covid-19 and the AI renaissance, there are countless reasons why pivoting or shifting a company's focus may be critical. Determining whether or not it's time to pivot is one of the great responsibilities of any business leader.
Throughout my career, I've started — and successfully pivoted — multiple companies in the past. It wasn't always easy, but I've learned several valuable lessons along the way. If the time is now for you to pivot your company, here is my advice:
- In the words of feminist scholar Gloria Steinem, "The truth will set you free, but first, it will piss you off." If you're considering pivoting your company, you had the painful realization that your company was headed in the wrong direction. Recognizing that your idea — that precious gem that inspired you to start the company in the first place — is not quite the diamond you hoped it would be can be devastating. Explaining to your friends, family and team that the business idea you pitched them all those years ago — the one they supported and invested their time in — needs an adjustment probably makes you want to bury your head in the sand. This is normal. If you didn't care, you wouldn't have gotten so far. My advice? Permit yourself to fully grieve your initial business case before you explain your pivot to the world.
- Join the broken heart club: Pivoting can be heartbreaking, but you're not alone. Wrigley's didn't always sell gum, Ninento used to sell vacuum cleaners, and YouTube was originally conceived as a video dating site. If you're pivoting your company, congratulations, you are now part of a group that includes some of the most successful entrepreneurs in the world.
- Remember, the best is yet to come: when we changed the company from Payfone to Prove, it was much more than a rebrand. The decision came from the need to update a legacy name after successfully pivoting from a mobile payment company with a much slimmer scope to one with an expanded focus on solving digital identity challenges for a much wider market. Today, our verification and authentication solutions are leveraged by leaders in banking, FinTech, merchants and other industries to accelerate onboarding, prevent fraud and boost revenue. If I didn't pivot, I would never have had the pleasure of working with so many great companies and the total addressable market (TAM) of Prove would be much smaller.
Related: How to Know When to Give Up, When to Pivot and When to Persist
The ancient Greek philosopher Heraclitus wrote, "The only thing constant in life is change." Nowhere is this more true than in business. Shifts in the market, changes in consumer behavior, breakthroughs in technology, and the emergence of new regulations require entrepreneurs to pivot frequently. Unfortunately, society often judges individuals and organizations that pivot, labeling them as erstwhile and short-sighted. As entrepreneurs, it's our job to ignore the critics and determine when to stay the course and when to pivot fast. Both choices have their risks. If you feel that pivoting your company is right, go for it.
