Today, in less than 3 minutes, we are going to cover the following: The Sunk Cost Fallacy
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Like many in life, my journey through post-secondary education taught me more about myself than it did about what I was studying.
This being said I do remember a professor preaching the concept of Sunk Costs in front of our class one day. He must have done an excellent job, as the concept has always stuck.
The Sunk Cost Fallacy: This occurs when individuals or businesses continue to invest time, money, and resources into a project or strategy simply because they have already invested heavily in it, despite evidence suggesting it may not be the most viable option moving forward.
Many of us agree with the concept, but do we stay true to it?
It’s easy to get emotional about decisions and sometimes we hold on to a decision longer than it is useful. Let’s get things going by considering some sunk costs in hotel operations.
Below-average hotel photos.
Opening a hotel without energy-efficient thermostats.
Big upfront investment in a piece of technology or software when you would be better off using a different piece of technology or software.
The list above could go on. However, the point is, when evaluating ROI on projects/initiatives, you have to be careful not to bring past investments into that decision.
Perhaps you spent $4,000 on hotel photos that came out subpar. These photos will hurt your marketing for the next 10 years. Should you reinvest in quality photos for $7,000 to bring you ROI down the road?
You just opened a new hotel and spent $70 per thermostat in all your rooms. The thermostats are brand new and have a life expectancy of 20 years. You are told you can get a 2.5-year payback by investing in a $250.00 per room energy management system. Do you do this even though you just purchased new thermostats?
You made a significant upfront investment in Sales software. It costs you $20,000 per property to implement with ongoing fees; let's say you invested 100,000 over five hotels. You plan on expanding your portfolio and find a new company that does the job better and does not charge upfront fees. Should you make this switch?
When going over these examples, we all know the correct answer. However, in real life, we can get blinded by our commitment to prior decisions. Understanding how to take the emotion out of past decisions can help you make better ones in the future.
This fallacy does not just equate to financial decisions. Perhaps there's an initiative you are pushing that is not producing an optimal outcome. A career you're investing in that is not bringing you optimal results. A commitment to certain opinions proving incorrect or no longer aligned with your values.
Should you keep beating a dead horse?
So the next time you are faced with a decision that can bring ROI to your hotel or your personal life; and a prior decision is getting in your way. Ask yourself, are sunk costs present in this decision?
As always, thanks for reading.
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