Did you know managers can make critical errors of judgement because of a well-known thinking error called the Sunk Cost Fallacy? This is the tendency to keep investing in something because you’ve already spent time or money on it. Of course, this can lead to bad decisions and poor results. Yet, you probably still make mistakes because of the Sunk Cost Fallacy.

For example, a managers might refuse to abandon a failing product line or service because of the time spent on it previously. Or they might not address the behaviour of an underperforming employee, because of the effort spent on training them originally. These situations arise on a daily basis. That is why leaders should be aware of the dangers that distorted thinking creates. You are a savvy leader, so you might be interested in research by marketing academics at Carnegie Mellon’s Tepper School of Business.

For example, their study revealed that most managers respect other people’s sunk costs as much as their own. That means you might make poor decisions because your business has already invested a lot of money in new software. Or because your team has been working together for a long time. The research showed this happened even when managers knew they needed to make change!

In another scenario, people were asked to imagine that they were accidentally scheduled for two trips on the same weekend. They told me that one flight cost $200 and the other cost $800 and they were much more likely to choose the more expensive trip. Even though it was less convenient for them. This is another example of irrational thinking caused by the sunken cost fallacy.

What does this mean for you as a busy manager or professional? Simply that you should avoid making decisions solely based on past investments made by either you or your team. Instead, focus on the current situation and make decisions based on what will provide the most benefit in the long run.

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This article summary was created by Eleanor Shakiba

Eleanor is a leadership trainer, success coach and people skills expert. She helps managers and business owners build thriving teams and organisations, using tools from Positive Psychology. She's trained more than 60,000 people during her career as a corporate trainer and professional development consultant. Her mission is inspiring talented people to become leaders who make a difference.