Fail Fast, Sunk Cost: Two Sides of One Costly Coin
In a recent article, I discussed the problem with “Failing Fast” — essentially, relying on your gut to make decisions without data. A reader pointed out that avoiding Failing Fast could lead to another costly issue—namely, the Sunk Cost Fallacy (SCF), where companies double down on bad investments rather than cut their losses, potentially wasting millions.
Both Failing Fast and the Sunk Cost Fallacy are two sides of one costly coin. Failing Fast relies on your gut to make decisions in the absence of data, while the Sunk Cost Fallacy relies on your gut to make decisions despite abundant data. Both sides are still emotionally charged and “gut-driven,” and both sides lead to bad decisions.
Gut vs. Intuition
But if gut-driven decisions lead to bad outcomes, why do we rely on our gut so much? We should know better.
There’s a crucial distinction I need to make here. “Gut” is not intuition. Intuition comes from experience and expertise. Gut reactions, on the other hand, are driven by the primitive parts of our brain, or what my friend and behavioral neurology expert, Michael Liebowitz, calls the “critter brain”.
According to behavioral neuroscience, humans basically have two brains: the evolved rational brain, and the unevolved critter brain. The rational brain handles logic and reasoning, while the critter brain makes sure you don’t die.
Your Critter Brain: Friend and Enemy
So, imagine you’re about to talk to the executive team about a US$50,000 sales investment you made that has turned sour. It’s been 12 months with no results. The stakes are high. Success means more money, and a steak dinner at a really high-end steakhouse – the kind with bathroom attendants. Failure means you could lose your job.
Your rational brain knows you won’t die if things go south, but your critter brain can’t tell the difference between the stress of this situation and a lion about to pounce on your face. It floods your system with stress hormones, and your gut takes control, using shortcuts, biases, your emotional state, and over-confidence to decide for you. Your gut says “Stay the course,” despite data telling you to cut your losses. So, you continue to throw good money at bad solutions, trapped in a cycle of repeated missteps where you manage to snatch defeat from the jaws of victory over and over again.
This primal reaction, meant to protect you from perceived danger with quick, decisive action, is actually doing more harm than good.
Success Means Breaking the Cycle
So, how do we break the cycle and prevent our gut decisions from potentially costing us millions in missed opportunities and wasted resources? Adopt a deliberate, data-driven approach to decision-making. Here are three strategies to help:
1. Acknowledge the Critter Brain
Recognize when your critter brain is taking over. When you feel stressed, rushed, or emotionally charged, take a deep breath. This activates your parasympathetic nervous system and puts the rational brain back in charge. Ask yourself, “Is this my gut (fear, uncertainty, doubt) talking, or my intuition (experience, expertise, wisdom)?” This question alone has saved me a fortune by avoiding hasty decisions.
2. Build a Knowledge Foundation
The critter brain activates in the face of the unknown because the unknown can kill you. The antidote is to build a solid foundation of knowledge in your industry, your business, and most importantly your customers. This reduces the likelihood of the “unknown” to trigger the critter brain.
Focus on key areas that directly impact your decision-making, like your customer. The more you know about them, the more confidently you can make decisions, and the less your gut will get involved.
3. Always Have an Exit Strategy
For every major initiative or strategy, establish clear, measurable milestones with predefined exit ramps. This helps you avoid both Failing Fast and Sunk Cost Fallacy. If you don’t reach a milestone, exit. This approach removes emotional decision-making from the equation.
The Million-Dollar Decision
Remember, the goal is to allow intuition (experience, expertise, wisdom) to outshine gut (fear, uncertainty, doubt) in your decision-making. The key is to recognize the difference and let intuition and data drive the bus, rather than giving in to fear-driven gut emotions. By implementing these three strategies, you can harness the best of both worlds.
So, the next time you’re faced with a crucial decision, pause, and ask yourself, “Is my intuition speaking, or is my critter brain about to make another million-dollar mistake?”
Learn to distinguish between the two and your richer future self will thank you. Just be sure to tip the bathroom attendant at that fancy steakhouse!
Contributed to EO by Zac Stucki, a growth strategist who specializes in helping early stage SaaS companies bridge the gap between early and widespread adoption. As the co-founder of Ignition Point Strategies, he moves SaaS founders from early traction to growth by using data to create a deeper understanding of your customer. Zac is also a sought-after speaker and workshop facilitator.
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