As the world continues to change at lightning speed, I keep returning to the concept of pivoting. We watch things fail every day and often know that cutting our losses and trying something new is the right thing to do but fundamentally can’t bring ourselves to do it because of the emotional and literal resources we have invested.
This tendency is called the sunken cost fallacy, popularized by Amos Tversky and Daniel Kahneman in 1972. (Kahneman might sound familiar because I profiled his book, Thinking Fast and Slow, in the January roundup.) The sunken cost fallacy causes us to hold on to things that are no longer giving us what we need (whether that be investments, relationships, or business products) because we’ve put so much time, money, and energy into them that we can’t imagine losing everything we’ve invested, even though it fundamentally already lost. The only thing hanging on does is increase the amount of effort expended and our loss aversion. (Loss aversion is a connected premise, also popularized by Amos and Kahneman.)
Every item in your closet that you don’t wear, but spent a ton of money on, so you never donate it, is a perfect example of the sunken cost fallacy.
“Paradoxically, the more sacrifices we make for an imaginary story, the more tenaciously we hold on to it, because we desperately want to give meaning to those sacrifices and to the suffering we have caused.”
― Yuval Noah Harari, Homo Deus: A History of Tomorrow
In our current global landscape, I am struck by the tendency toward loss aversion as we watch the global energy crisis unfold.
As gas prices increase, countries prepare for a global energy shortage this winter, and communities face grid failure in the face of scorching heat, we see governments of all sizes doubling down on oil and gas. No matter your political persuasion, the hard truth is that oil and gas will eventually be gone—it is a finite resource. So even without considering climate change or environmental devastation, you would think that pivoting away from oil and gas would be a smart move in the long run. But instead, we see countries of all sizes embracing a “drill-baby-drill” mentality and investing billions in revamping and creating oil and gas infrastructure.
Classic sunken cost mentality.
We’re all (including me) invested in the existing way of getting and using energy to such an extent that we double down on existing systems even when we know they are doomed to fail, instead of using those same resources to invest in a more sustainable alternative.
I know this isn’t a black-and-white problem, and it doesn’t have an immediate solution. Energy policy, infrastructure, and economics are incredibly complicated issues that aren’t as easy to solve as just deciding to add some solar panels and call it a day. Not everyone can just go out and buy a Tesla when gas prices get crazy. Renewable energy is also not a perfect solution for a world that has become entirely dependent on unlimited access to oil and gas.
This isn’t a post about energy policy or my opinions about the right way to avert future energy crises. It is about the mental gymnastics we have to do to see through the sunken cost fallacy. The bottom line is that we’re all doubling down on something that is not only destined to disappear someday but also makes us dependent on corrupt systems and governments. Instead of focusing on ways for us to be less dependent on oil overall, we’re thinking of ways to make us less dependent on foreign oil, make oil cheaper, etc.—kicking the proverbial can down the road. Cities, states, and countries have invested so much mentally and materially in petroleum that it is impossible for us even to fathom leaving it behind. And so we sink even more into it, increasing our investment instead of cutting and running when we should.
And that brings me to where I’m dealing with loss aversion and sunken cost mentality in my own work.
Over the last two years, I’ve co-developed and run a community for freelancers with a business partner. We started it as a place for freelancers to come together and support one another. After multiple failed launches, campaigns, and thousands of dollars in investment, we’ve concluded that it isn’t going to work—or at least not in the way we thought it would—as a thriving community and passive income source for both of us.
It took us a long time to come to this conclusion while weighing the emotional and financial investments we put into the venture. Emotionally, it was a part of my identity; I told everyone about it and how it would help freelancers worldwide. We both invested considerable time getting it off the ground, building the membership site, and promoting it. We hired freelancers to help us with ads, content design, admin support, and copywriting.
As we decided over the last few months to wind it down, I felt like a failure…like an amateur who didn’t think about the costs and time needed to build a community. I wanted it to work SO bad, not just for financial reasons, but because I thought it would genuinely help people.
Now, all business gurus will tell you to embrace failure, learn from it, and fail early and often. Hell…I’ve even said that myself. But the truth is failure sucks. And while my freelancer community will live on (sort of) through the podcast that I still do with my partner, we failed at what we set out to do for all intents and purposes.
I saw failure looming; if I hadn’t given into sunken cost fallacy and loss aversion, we would have cut and run a lot earlier. That would have saved us quite a bit of time and money, but emotionally I would have had to admit failure before I knew it was inevitable.
I know the title of this post is “When to Pivot,” but the truth is there isn’t an easy answer. If you pivot (aka give up) too soon, you’re not giving your crazy idea a chance to succeed. If you pivot too late, you’ve wasted more time, money, and energy than you needed to. Sometimes you have to wait until something has well and truly failed to be able to let it go.
As I’ve said before, success has nothing to do with money, and sometimes we do the crazy thing for the sake of doing it without assigning metrics for success or failure. In this case, I formed a great partnership with someone who will be a lifelong friend, learned a TON about launching an online product and community, and pushed myself out of my comfort zone (I swore I’d never start a podcast). I think all those things are worth the sunken costs from a purely financial perspective.
I also learned that failing in silence is much easier than saying it out loud to a whole list of people. And so I’m walking my talk about failing by sharing that failure with you. Hopefully, you’ll pay that forward next time you fail and shout it from the rooftops, so someone else will know it’s ok…even though it sucks.
Suppose it is this hard to cut my losses with something so small and seemingly meaningless in the face of global catastrophes. What does that say about our ability to cut our losses and pivot on complicated issues such as energy policy (food policy, racism, or economic policy)? Maybe it means that we have to get to a point where failure is undeniable before we can pivot because pivoting at any point before that is just too hard. The problem with waiting for rock-bottom failure on those types of issues is that the costs are no longer just mental or financial; they’re also lives, livelihoods, and communities.
Not yet a hustler?
Check out my book Instant Freelancer: How to Start a Business of One for the shortest path to independent work and money in the bank. No venture capital, fancy website, or MBA needed.
Already got a hustle, but want to do it smarter?
Apply to join my Solopreneur Collaborative mastermind or consider individual coaching.
© Sarah Duran 2022
Find out more about me and my company, Fruition Initiatives, here.
Image by ilkercelik from iStock
The Obvious Disclaimers…
This information is for educational and informational purposes only. It is not intended as, and shall not be understood or construed as, professional advice. What you decide to do with this information is up to you and all repercussions are on you.