The Myth of Sunk Costs
Have you ever heard the expression, "Throwing good money after
bad?"
Have you ever worked on something you knew was a bad idea, yet
continued to pour time and energy into it? And every time you
tried to stop yourself from going forward, you said, "but I've
got so much put into it!"
When we make decisions about the future, many of us base a good
part of our analysis on the resources we have invested thus far.
It's a natural thing to do; you've put time, energy, money,
perhaps other things - and perhaps most important, your
reputation - on the line, and it's quite reasonable to consider
the totality of that investment when thinking about what you do
next.
Actually, it isn't.
It isn't reasonable at all.
The only reasonable thing that to consider is the impact of your
actions on the future.
Say you've spent the last several years and a bunch of money
into a venture that simply isn't performing as you hoped. You
haven't hit any of your success marks, and in fact, you're not
sure the project is worth anything at all. So by and by a new
opportunity comes along - one that is filled with potential, and
in some ways seems like a perfect match. But you have difficulty
letting go and jumping in. Something's holding you back and that
something is the specter of sunk costs.
You feel like you shouldn't just walk away from all the cash and
time you've already invested. You feel as if everything you've
put in should somehow make the venture worth something.
I've got bad news for you...
It doesn't.
The venture may be worth something, but its value has nothing to
do with how much you've spent to date. It is worth what it is
worth, and for good, bad or otherwise, the amount of money,
time... whatever... has nothing to do with it.
That's the fallacy of sunk costs.
Sunk costs are sunk.
They are gone.
They are spent.
The assets you've created may have some surplus value, like
unused inventory. Or they may have salvage value, and just like
the 5-1/2 tons of gold bullion on the HMS Edinburgh, that value
might be quite large. You wouldn't just walk away from assets
with salvage value like that. But in many cases the value of
your sunk costs is a tiny fraction of the original price.
No matter the value, none of this has anything to do with
decisions about actions you will take today, tomorrow and the
next day, which must be weighed on the merits of highest and
best use.
Ask yourself the question, "What is the highest and best use of
my time?" or "What use of my time will make the greatest
contribution towards my aims and goals?" Ask this question
without regard to what has happened until now.
Perhaps you've spent the past three years developing some
software that you thought was going to change the world. Three
years later, it works, but not brilliantly. In the meantime, a
competitor has built a superior solution that runs rings around
yours in the lab and in the marketplace and things are looking
pretty grim.
But you have just stumbled across a brand new business idea -
that has nothing to do with your software business - that you
can implement quickly and profitably. What do you do?
Many people, would, quite reasonably say, "I've spent so much on
this product, and I'm so close - I'll just keep working on it.
But you know that would be wrong. It would not be the highest
and best use of your time; it wouldn't give you the greatest
return on your actions. That would be a decision based solely on
your attachment to the past and your attachment to your sunk
costs.
Be unreasonable. Make each decision as if there were no past
attached. Make each decision based on your highest and best use
- your greatest contribution. Evaluate each decision based on
how it will impact your ability to get what you want, not on
what you've spent to get where you are.