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The Concorde Fallacy and why people make bad decisions.
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In October 1956 the UK Ministry of Supply asked Welsh Aeronautical Engineer Morien Morgan to form a study group. They called it the Supersonic Transport Aircraft Committee (STAC).
The British Government gave STAC a £1 million contract for a feasibility study.
The goal was to design a SST project and find the right industry partners to build it.
The goal was to design a SST project and find the right industry partners to build it.
SST is jargon for supersonic transport. Which basically means any transportation that's faster than the speed of sound.
STAC called the project 'Concorde'.
After failed negotiations with America, Britain decides to search for a new partner.
After failed negotiations with America, Britain decides to search for a new partner.
France and the UK shared the same dream. To build these supersonic airplanes that could fly across the Atlantic in under four hours.
So in 1962 France joins the Concorde project.
So in 1962 France joins the Concorde project.
The British and the French Government sign a treaty. They agree to share design, development and production costs.
They estimated the project would cost about £150-170 million.
They estimated the project would cost about £150-170 million.
But by 1973 the development costs had risen to £1.065 billion.
When Concorde made its first commercial flight on 21 January 1976, the project was financial disaster.
When Concorde made its first commercial flight on 21 January 1976, the project was financial disaster.
Britain and France realized that the project wasn't going to pay off. The Concorde project wasn't profitable. It was impossible to recover from such shocking cost overruns.
But Britain and France continued to sink money into the project anyway. To save face. And because they had already invested billions.
On April 10, 2003 the inevitable happened. Air France and British Airways announced they were retiring their fleet of Concorde aircrafts. This was the end for Concorde.
Here’s the thing. Our brains tend to think of money we've spent as money that's "still on the table". Behavioral economists call this the "sunk cost bias".
This mental trap is also known as the Concorde Fallacy. I'll tell you more about it in a minute. But first, let’s talk about sunk costs.
A sunk cost is a payment or an investment you can't recover by any means. Research & development, marketing & advertising expenses or rent are classic examples of sunk costs.
But sunk costs aren't just financial. They can also be based on how much time, emotion, or effort you've invested in something.
Ever wondered why do people finish watching movies or reading books they aren't enjoying?
Or why do people keep paying their gym membership but never go to the gym?
Or why they keep so many clothes in their closet that they are never going to wear?
Or why do people hold on to stocks or other investments that are underperforming?
Or why they keep so many clothes in their closet that they are never going to wear?
Or why do people hold on to stocks or other investments that are underperforming?
The answer? The sunk cost bias, a mental trap that makes us hold on to loss-making investments or projects.
Just because you've already put time, energy and emotional effort into it. And you're hoping to recover from the losses (Kahneman & Tversky, 1979).
Just because you've already put time, energy and emotional effort into it. And you're hoping to recover from the losses (Kahneman & Tversky, 1979).
Read more about it here.
https://creativesamba.substack.com/p/the-concorde-fallacy-and-why-people-22e
This post is technically only for paid subscribers to my newsletter. But hey, here's a rare freebie.
https://creativesamba.substack.com/p/the-concorde-fallacy-and-why-people-22e
This post is technically only for paid subscribers to my newsletter. But hey, here's a rare freebie.
Oh and it includes a few actionable insights:
1. How to avoid taking sunk costs into account when making business decisions.
2. How informing your customers of a sunk cost can actually help you increase your sales.
3. How to make people chase their good investment.
1. How to avoid taking sunk costs into account when making business decisions.
2. How informing your customers of a sunk cost can actually help you increase your sales.
3. How to make people chase their good investment.
