Picture this: You're six months into developing a new product feature. The team has poured countless hours into it, the budget is running over, and deep down, you know it's not working. But you push forward anyway, telling yourself, "We've invested too much to stop now."
Sound familiar? You're not alone. That’s the sunk cost fallacy in action. Despite being a common trap, the real danger of this bias is often misunderstood.
The Hidden Trap That's Killing Your Products
The sunk cost fallacy isn't just some abstract concept from Economics – it's a psychological trap that's derailing product teams every day. With 95% of new products failing and 90% of apps losing their daily active users within just 30 days, we can't afford to let cognitive biases drive our decisions. (Jackowski, 2023).
But here's what makes it so tricky: It's not just about money. It's about pride, team morale, and that nagging feeling that giving up means failing. We're hardwired to finish what we start, even when the smart move is to cut our losses and pivot.
The Cost of Stubborn Investments
Let’s face it: most of us hate leaving things unfinished, and that’s exactly what fuels the sunk cost fallacy. Our emotional attachment to what we’ve already invested often clouds our judgment.
For example, a study found that people were more likely to choose a more expensive holiday over a cheaper, more enjoyable one, simply because of the money already spent. Even when someone else footed the bill, the bias remained. (Ducharme, 2018)
In product development, this often leads teams to ignore the need to pivot, driven not only by their own investments but also by the resources committed by colleagues or the company as a whole.
Learning from Kodak and Netflix
Take Kodak’s downfall, for example. The company had the technology to lead the digital revolution but hesitated to abandon its profitable film business, fearing it would waste past investments. In contrast, Netflix disrupted its own DVD rental business by embracing streaming, even before the market fully shifted. This focus on future opportunities, rather than clinging to past investments, led to Netflix's success. (Baek, 2024) (Boyle, 2023)
How MVPs Help Teams Break Free
An MVP allows teams to test an idea with minimal investment. By focusing on core features and gathering real user feedback, teams can quickly decide whether to pivot or continue. If the concept doesn’t work, it’s easier to change direction without wasting significant resources.
For instance, Dropbox created a simple MVP—a video demonstrating file syncing—before writing a single line of code. This MVP validated their idea, attracted thousands of users to their waiting list, and provided real feedback that shaped the product’s development. (Glauser, 2023)
Tackling Cognitive Biases with MVPs
MVPs help mitigate several cognitive biases that often lead to poor decision-making in product development: Loss Aversion: Loss hurts more than gain feels good. MVPs reduce perceived loss by testing ideas on a smaller scale, which makes teams more willing to take calculated risks. With a lower risk of failure, teams can experiment and pivot without fearing large-scale losses. Confirmation Bias: Confirmation bias leads teams to seek data that supports their existing plan while ignoring contrary evidence. MVPs address this by requiring teams to gather unbiased user feedback. This real-world data helps teams validate assumptions and make necessary adjustments, ensuring decisions are based on facts, not pre-existing beliefs. Commitment Bias: Commitment bias keeps teams tied to failing plans simply because they’ve invested time and resources. MVPs help teams avoid this trap by promoting small, iterative tests instead of committing to large-scale projects upfront. Early feedback allows teams to pivot based on real user behaviour, not past investments. Anchoring Bias: Anchoring bias occurs when teams place too much importance on initial estimates or ideas. MVPs counter this by encouraging teams to test their assumptions early, gather user feedback, and iterate based on actual data, rather than being locked into outdated ideas.
MVP in Three Steps
To avoid the sunk cost fallacy and cognitive biases, apply the MVP approach in three simple steps:
Start Small: Build a basic version with only the core feature focussing on the core value proposition i.e. "What's the smallest thing we could build to test our biggest assumption?"
Test Quickly: Gather user feedback through structured experiments.
Iterate Based on Data: Adjust or pivot based on actual user behaviour, not past investments. Remember that changing direction isn't failure; it's smart business.
The Value Is in the Pivot
Success in product development isn't about never failing – it's about failing fast, failing cheap, and learning from every misstep. The sunk cost fallacy wants you to look backward at what you've already invested. The MVP mindset pushes you to look forward at what you could become. Every tech giant you admire started with something small and imperfect. They succeeded not because they stuck to their original plan at all costs, but because they were willing to learn, adapt, and sometimes completely reinvent themselves based on real-world feedback. What past investments are you holding onto right now? Maybe it's time to take a fresh look at your product roadmap through the MVP lens and consider if you too have fallen into the sunk cost fallacy trap.
Works Cited
Baek, D. S. (2024, January 3). How the Sunk Cost Fallacy Led to the Downfall of Iconic Companies. Retrieved from LinkedIn: https://www.linkedin.com/pulse/how-sunk-cost-fallacy-led-downfall-iconic-companies-baek--fyjzf/?trk=article-ssr-frontend-pulse_more-articles_related-content-card
Boyle, G. (2023, November 7). The Netflix Pivot: From DVD Rentals to Streaming Giant. Retrieved from Planning the future blog: https://gb3.ai/planning-the-future-blog/f/the-netflix-pivot-from-dvd-rentals-to-streaming-giant
Ducharme, J. (2018, July 26). The Sunk Cost Fallacy Is Ruining Your Decisions. Here’s How. Retrieved from Time: https://time.com/5347133/sunk-cost-fallacy-decisions/
Glauser, O. (2023, August 23). How Dropbox started: The MVP strategy that launched a giant. Retrieved from glauser.com: https://glauser.com/thoughts/how-dropbox-started-the-mvp-strategy-that-launched-a-giant/
Jackowski, K. (2023, 08 24). How to Retain and Engage Users of Your Mobile App? 13 Tips for 2023. Retrieved from Netguru: https://www.netguru.com/blog/user-retention-in-mobile-app
