Guest BloggerProduct ManagementStrategy

Product Strategy in Light of the Sunk Cost Dilemma

By Rivi Aspler

Wikipedia defines a sunk cost dilemma as:

a dilemma of having to choose between continuing a project of uncertain prospects already involving considerable sunk costs, or discontinuing the project. Given this choice between the certain loss of the sunk costs when stopping the project versus possible – even if unlikely – long-term profitability when going on, policy makers tend to favour uncertain success over certain loss. As long as the project is neither completed nor stopped, the dilemma will keep presenting itself.

The sunk cost fallacy is sometimes known as the Concorde Fallacy, because the British and French governments continued to fund the  Concorde even after the economic case for the plane had vanished.

Privately, the British government viewed the Concorde as a “commercial disaster”, but political and legal issues made it impossible for either government to pull out

What does the Sunk Cost Fallacy have to do with Product Strategy?

The Concorde is a mega-example, but Daniel Kahneman and Amos Tversky proved that we all invest in products and services that we should take our hands off sooner than we actually do. The investment in software products is not different from any other type of investment. You should therefore keep your eyes open, be aware of the Sunk Cost Fallacy and systematically rethink your roadmap investments once a year.

Now, take one of your products and test yourself ….

  • Has this product’s ROI been negative (hence demonstrating the overly optimistic probability bias, whereby after an investment the evaluation of one’s investment-reaping dividends is increased) ?
  • Do your sales people lower the product’s price, below market standards, in order to close deals?
  • Would you have built the product differently had you started its design today?
  • Does the investment in this product subtracts ‘food’ (i.e. money) out of other, more successful, products?
  • Are you responsible for this product?, hence demonstrating the requisite of personal responsibility bias (whereby sunk cost appears to operate chiefly in those who feel personal responsibility for the investments that are to be viewed as sunk)

So… are you throwing good money after bad?


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