The Danger of Sunk Costs in Product Development

Commitment is a valuable trait in product development. In order to be successful, we typically have to overcome a wide array of challenges and obstacles.

Believing in your work and doubling down when things get tough are traditionally viewed as valuable traits when attempting to create innovative new products. But there is a dark side to commitment. The emotional attachment that individuals and teams develop to their work has the potential to derail projects in the long run.

In behavioral economics (bear with me), there’s a particularly nasty psychological pitfall known as the sunk cost fallacy. A sunk cost is a cost that has already been incurred. The money is gone, it cannot be recovered, and hopefully there is something good to show for it. The potential danger with sunk costs is that once we have paid money for something, we tend to treat it as having value, regardless of its actual worth. While the money is gone, we have a tendency to treat the outcome of the expense as having value based on the previously incurred cost when making future investment decisions. Our commitment to our past decisions and investments clouds our thinking moving forward.

We’ve all seen people make questionable decisions because of the sunk cost fallacy. The investor that hangs on to a lousy stock because they need to recoup their losses. The company that spends millions attempting to fix a doomed piece of software because so much has been invested in it already, even though better alternatives exist. The manager who keeps a mediocre employee around because so much money was spent training them. The simple truth is that the money that has been spent is gone. It’s dead, it should be forgotten, but we cling to it hoping that we can make something good come out of our previous bad decisions.

It’s dead, it should be forgotten, but we cling to it hoping that we can make something good come out of our previous bad decisions.

The solution to the sunk cost fallacy in economics is to account for sunk costs as what they are worth: absolutely nothing. When running a cost-benefit analysis, sunk costs are intentionally left out of the equation. By doing so, decisions can theoretically be made based on opportunity for future gain, rather than based on the outcome of past decisions. In technology and design, however, not all of the costs that we sink into our work can be captured on a spreadsheet.

When working on a new product, we invest much more that money. We spend time and effort working on every detail of our projects. We make careful decisions based the best information available to us at the time. The emotional investment that we make in our work is just as powerful as a financial investment. When we have to write off emotional costs, it feels as if our time and effort were wasted. Furthermore, with sunk economic costs the sense of attachment comes from not wanting to give up on something you paid for; the sunk emotional cost in product development comes from not wanting to give up on something you created. Throwing out something you’ve created is excruciatingly painful. It means admitting that your past thinking was flawed, your past decisions were wrong, and your past effort was wasted.

In order to effectively respond to change in product requirements (keeping in mind that in technology development, requirements ALWAYS change), it is necessary to build up the courage to write off sunk emotional costs. Doing so is a difficult task, but it is critical to long-term success. On the Myplanet prototyping team, our requirements are often fuzzy, and always changing. While we don’t keep a balance sheet of the time and effort we sink into various elements of our process, there are several steps we take to keep ourselves from falling for the sunk cost fallacy.

We’ve learned the hard way that the amount of time, money, and effort we sink into any given product or feature should be proportional to the likelihood that the requirements for that feature will change. By testing simple sketches, mockups, archetypes, and interaction models, we can validate (or, equally valuably, invalidate) our assumptions about the direction of a product. While it still stings a little, throwing out an hour or day’s worth of work is far less painful than a week or a month’s worth. As we develop more confidence in our assumptions and direction, we start to increase fidelity accordingly.

 

We’ve learned the hard way that the amount of time, money, and effort we sink into any given product or feature should be proportional to the likelihood that the requirements for that feature will change.

 

As a check against sunk emotional costs, it’s important to have frequent and meaningful external validation of your work. No matter how cognizant of the sunk cost fallacy you are, it can be difficult to realize when you are falling for it yourself. Internal consultation, external consultation, and user testing provide avenues for validation of features by people without an emotional attachment to the product. For best results, remove people who worked on the project from this validation process as much as possible, in order to minimize emotional connection to the product in the testing procedure.

Finally, and most importantly, it is important to develop an understanding on your team that nothing is sacred. Every person involved in the process of creating new things, including clients and higher-ups, needs to recognize that while writing off sunk costs is painful, it’s a necessary and noble thing to do. No matter how much work has gone into developing a feature, no matter how awesome it seemed when it was being made, when requirements change or new information arises invalidating the feature, it’s time for it to die. The decision of whether to keep, adapt, or discard aspects of a product due to changing requirements should be based on what will deliver the most value going forward, regardless of what happened in the past. Nurturing an environment where making the decision to write off sunk work is seen as a victory rather than a failure is critical for successful innovation.

Finally and most importantly, it is important to develop an understanding on your team that nothing is sacred.

 

On my prototyping team, we say that it’s a part of our job to “keep killing our babies.” We love our products, and have raised them from simple code snippets and color palettes to functional, beautiful things. But when the time comes, and products and features are invalidated by time, they get the axe. This brings us to the difficult balancing act of innovation; in order to succeed in making great things, you need belief in, and commitment to, your work - but you must also be ready and willing to let it go.

Written by

Charlie Moscoe

Charlie Moscoe

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