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.
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.
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.
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.
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.
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?
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).
Now that you understand the human psychology behind sunk costs (Hal Richard Arkes & Catherine Blumer, 1985) you are in a much better position to predict and influence customer behavior. And also your own behavior.
Takeaways for your business:
1. Avoid taking sunk costs into account when making business decisions.
Good business decisions should always point to future benefits. We've all made decisions that don't work out. And that’s fine. We’re humans, shit happens. But good decision makers know when to give up on a bad investment.
2. Informing your customers of a sunk cost can actually help you increase your sales.
One of my clients, Sunday, a direct-to-consumer mattress startup from India does this well. When you put through an order on their website, this is what happens:
Your cart reminds you what's your total investment (notice that the copy I wrote doesn't say "total price". It says "total investment"). Then below you'll see another message I wrote. It says, "Bedding essentials to turn your sleepless nights into blissful nights. For only a few Rs more."
This little persuasion trick can help dramatically increase Sunday's average cart value. Just by reminding customers how much they've already invested. And highlighting that for just a few extra indian rupees they can complete their bedding collection.
3. Make people chase their good investment.
My favorite restaurant in Lisbon is a Mexican Antojeria called Izcalli. A friendly couple, Ivo and Paola, run the place. Izcalli is a tiny restaurant, and it's incredible.
Imagine a counter, only eight seats for eight lucky people to enjoy authentic Mexican food with a modern twist. Me and my girlfriend have been regular clients since Izcalli opened doors in 2018.
In 2019, Ivo & Paola were dealing with a lot of no shows and last minute cancellations. This was hurting their business financially. So they came up with a solution. A simple No Show Policy: If you want to make reservations, you have to book seats via Izcalli’s website. And you need a credit or debit card to make a reservation.
Cancellations are free, if done at least 24 hours before the reservation. Otherwise Izcalli will charge you a No Show fee for missing your reservation.
A day before your reservation, they send you an email reminding the date and what you can expect.
The copy could be a bit more conversational and tell you more about the incredible fresh, earthy tastes and smells you’re about to experience. But this reminder email works anyway. Because it increases the sunk cost effect and your desire to show up.
And if for any reason you have to cancel last-minute, you'll probably just show up anyway to avoid paying the No Show fee. Or you’ll figure out a way to gift your reservation to a allow a friend to show up on your behalf.
✍️ Today’s Mini Creative Exercise: Make your prospects chase their good investment
Pick a product you want to sell more. Think of your target customer and the problem your product solves.
Write a short paragraph that reminds people of your #1 consumer benefit. How? By dramatizing the benefit of your product.
Don't write about what the product is, but what the product will do for your customer. Use simple language and explain what your product does best. And use the sunk cost bias to motivate your target customers.
Example:
Let’s imagine you’re selling lacquer. And your brand is called Lacquer Gold.
Deep down inside, both you and your target customer know this is true:
When you brake things like a jar or a vase, the easiest thing to do is throw that piece away and buy a new one.
But you really loved that old jar. And it was a really realllllllly expensive jar.
So here's what you could say:
"If you've invested in a beautiful jar or vase, but recently broke it, now there's a better alternative to throwing it away. Embrace the imperfect and give it a new life with Kintsugi - the beautiful Japanese art of repairing broken pottery with gold. All you have to do is glue the pieces together with Lacquer Gold and gold powder (the gold powder is on us.)"
Now, your target prospects aren't throwing the broken pieces away anymore.
Instead, they’re buying your lacquer brand, all thanks to their sunk costs and your new persuasive message.
Hit reply if you have any questions.
Your pal,
Miguel Ferreira
Founder & Chief Copywriter, Teardwn + Nishi + Jack Had A Groove FM
(Good copywriting that helps you sell more this year than last. Work with me.)
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