LogoWorks - A Bad Decision (Sunk Costs)
Using LogoWorks (a logo design company) is officially my worst decision of the last tax year!
Don't worry, this isn't a rant...we've all experienced atrocious customer service. If there wasn't a crucial point behind the story, I wouldn't waste the bandwidth (and, far more importantly, your time). Bear with me...everything will become abundantly clear.
LogoWorks: In two sentences…
After nearly two months of (in my opinion) awful customer service, the final straw was waiting over two weeks for the person overseeing my project to reply to a phone call. And so I emailed her with this comment: "I've realized that all I'm going to get out of this experience is...a $399 education in making a better choice of vendor next time around." (FYI: My request for a refund was denied.)
The crucial question is...
What did I actually learn for my $399 and how might the lesson benefit you? When I reevaluate my choices, the (thankfully rare) bad decisions fall into two distinct camps.
- Knowing what I knew then, I would do exactly the same thing. (For example, buying software just before the announcement of a new version came out...ouch!)
- With information available at the time I could have made a better choice. (Notice I "could" have made a better decision. Not I "should" have made a better decision...No point beating myself up.)
Sunk costs...
The key to understanding my dumb decision to fork over $399 to LogoWorks lies in the psychology of sunk costs.
A long list of psychological studies have shown that most people (including me, it seems) are highly "loss averse". We're far too sensitive to losses resulting from past decisions when it comes to making a future, related decision.
A classic example (from economist Richard Thaler) concerns the bad decision to purchase shoes that turn out to be uncomfortable.
Here's the thing: The length of time a person will limp around wearing a pair of uncomfortable shoes (and how long the discarded shoes will languish in his/her closet) is related to the original price of the shoes...The more expensive the shoes, the longer we suffer them and refuse to throw them out.
Fact is: The price of the shoes is an outstanding example of a "sunk cost". Logically, our decision to continue wearing the shoes and/or toss them out should be future oriented (not past oriented). If I wear the dreaded shoes, how uncomfortable will I be today?
However, in practice, we look over our shoulder at the price we've already paid and make our decision (to keep/wear the shoes) with far too much reference to the sunk cost...Which brings us neatly back to my awful LogoWorks decision...
Key Point...
From now on, remind yourself about sunk costs whenever a "satisfaction guarantee" involves the loss of an administration fee. Here's a quote from Morgan Lynch (LogoWorks' CEO)
"If you don't like your original concepts, contact us before your first revisions for an immediate refund, minus a $99 administration fee..."
Stop and think about this satisfaction guarantee from the "sunk costs" perspective. Having to pay $99 for a concept you don't like is similar to what? Exactly, persevering with an uncomfortable pair of shoes.
And so after seeing the initial concepts, rather than leaving my $99 bucks on the table and running fast in the opposite direction (in my uncomfortable shoes)...I got sucker-punched (by the psychology of sunk costs) into continuing with the project to the tune of another $300 bucks...seriously, ouch!
One final point: As you look at your dwindling mutual funds and ponder dumping them, don't pay too much attention to how much you paid for them. Because, all together class...
That would be a sunk cost! (As was the hours I spent trying to resolve the situation with LogoWorks.)
This is one in a series of articles about the pitfalls in decision-making and how even smart, educated people tumble into them…
Click here to let me know what you think of this article: Decision-Making (Sunk Costs)
