Is the sunk cost fallacy holding you back from making critical business decisions?

Let’s begin with a story. Mr. Smith bought three computers for his business two years ago. The machines still perform as expected, but they have started to lag and now take 10 minutes just to boot up. Although Mr. Smith knows his business could use new computers, he refuses to upgrade because he thinks doing so will put his investment in his initial three computers to waste. Mr. Smith has fallen for the sunk cost fallacy.

In economics, a “sunk cost” is a cost that you have already spent on and can no longer recover. In Mr. Smith’s case, the price he paid to purchase his first three computers is a sunk cost.

The sunk cost fallacy is a type of cognitive bias, which is an erroneous or irrational thought pattern that prevents you from appraising an issue and coming up with a relevant resolution. This particular cognitive bias compels you to continue bad decisions or behaviors because you have already invested your time, money, and emotions in them.

You believe that pursuing a different option, no matter how great its advantage over your current choice may be, diminishes or squanders your initial investment. Because of this, the sunk cost fallacy is also called the status quo fallacy.

This fallacy is dangerous because it prevents you from taking risks. It keeps you from exploring options that could potentially boost your operational efficiency or improve your products, stalling your business’s growth as a result.

As a business owner, taking a step back and looking at the bigger picture can help you overcome the sunk cost fallacy. Look back to your investments and determine, with the help of actual facts and figures, whether they are bringing you closer to your goals or not. Let go of any personal and emotional attachments and approach the matter as rationally as you can.

Keep in mind that sunk costs can never be recovered, no matter what you do. In Mr. Smith’s example, there is no way for him to regain the money he spent on his old computers, so the cost should not be a factor in whether or not he will upgrade. His decision ultimately falls down to whether he should stay with old, malfunctioning units or buy new and more powerful machines that would benefit his business in the years to come.

When it comes to your IT system, working with experts such as managed services providers (MSPs) can also help you make objective and realistic decisions. In particular, these are two ways an MSP can help you overcome the sunk cost fallacy:

#1. Managed services have much to offer

MSPs offer a comprehensive suite of services that are tailored to the needs of your business and can help you transition out of sunk costs. Cloud storage, for instance, is an expandable and much more secure alternative to expensive, on-premises servers. It can also be accessed anywhere through the internet, which is great if you want to improve your team’s flexibility and efficiency.

Some business owners hesitate to upgrade because, like Mr. Smith, they are concerned about the sunk cost of their current IT system. One of the ways MSPs can help in this regard is through Hardware-as-a-Service (HaaS), which allows business owners to rent or lease state-of-the-art equipment for a low monthly fee. In HaaS, the MSPs take care of updating and upgrading the machines to ensure that your business is equipped with powerful computers that meet your requirements.

Sunk cost fallacy may also apply to people. Maybe you have a good relationship with your internal IT staff or you’re concerned that you’ve already spent too much just to replace them with an MSP. But working with an MSP doesn’t mean you need to let your in-house team go. In fact, you can consider co-managed IT, which combines your internal team and an MSP and gives you the benefits offered by both.

#2. Managed services come at a fixed cost

For all the services they offer, MSPs charge a flat monthly fee that’s much lower than the cost needed to purchase and maintain your IT system by yourself. The absence of an upfront investment needed to get started with an MSP will make leaving the status quo and transitioning to managed services much easier for you.

If, like Mr. Smith, you have doubts about upgrading your IT system, Zeta Sky can help you make the right decision and access state-of-the-art tech solutions for an affordable price you won’t regret. Contact us today to learn how!

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