Sunk Cost

 Sunk Cost

 I was watching a bad movie the other day, but because I had already invested more than an hour into watching this epic failure, I stuck it out until the very end, for no other reason than to give it a thumbs down rating.  What a waste of time that was and I should have watched or done something else. Time I will never get back.

So, this topic hits a little too close to home for me, and perhaps will for you as well.  I have been guilty of sticking with something way too long too many times in my career, because of my investment of time or money into it largely from my passion for the outcome or project.

As Business Owners, we tend to make up our mind about something quickly.  You’d be interested to know that this happens to be a common characteristic of entrepreneurs.  But then again, so is our reluctance to change our minds, or we tend to stick with things longer than most people would or worse, longer than necessary.  Perhaps it is the tenacity of the business owners that doesn’t allow us to quit.

On one hand, these can be valuable traits to have, but we must learn when “enough is enough” and learn when to stop beating the proverbial dead horse.

Sunk Cost Fallacy

The “sunk cost fallacy” refers to the tendency for people to continue investing time, money, or effort into a project or decision simply because they’ve already invested significant resources into it, even when continuing is not the most rational or beneficial option. This is often driven by the emotional attachment to past investments, rather than focusing on future benefits or outcomes.

Rational decision-making should focus on future outcomes, not past investments that can’t be recovered (i.e. – the “sunk cost”). Does this sound like you? Keep in mind that, as I mentioned earlier, it could be a valuable trait if we don’t become mired in excessive or needless time consumption that could otherwise be used doing something more productive.

Let’s talk about how to avoid the sunk cost fallacy. It’s important to shift your mindset and focus on future outcomes rather than past investments. Here are some strategies to help recognize sunk costs.

First, be aware when you’re making decisions based on past investments that can’t be recovered. Just acknowledging it, can help you move past it. While reflecting on that, focus on the future value. Evaluate decisions based on the potential future benefits rather than what you’ve already put in. Use this as your litmus question, “If I started fresh, would I make the same decision?” Once you have set the table for moving forward, here are some simple steps to follow:

1. Set clear goals and criteria: Have predefined benchmarks or criteria for when to continue or stop a project, helping you evaluate progress objectively.
2. Embrace the loss: Accept that sunk costs are gone and can’t be recovered. It can be difficult, but accepting the loss allows for more rational decision-making moving forward.
3. Seek outside perspectives: Others who are not emotionally attached to the situation may offer clearer, more rational advice.
4. Take time to reassess: Take a step back when making important decisions. Rushing can lead to emotional reasoning; reflection often leads to better choices.
5. Detach emotionally: Recognize when emotions are driving decisions and try to separate them from logical analysis.

These practices can help you avoid the trap of throwing more resources at a lost cause just because of past investments.

The word “quit” is not often used in the entrepreneurs’ vocabulary.  It is difficult for a person who is determined to accomplish something to change direction.  We build a plan, we follow that plan, and we want to see it completed.  While quitting goes against our instincts, we must learn how to continually evaluate and reevaluate our past decisions and quit when necessary.

Usually, we do that when new information presents itself, information about your changing marketplace, your operational limitations, unexpected costs, or your cashflow.  We do not need to be neurotic about second guessing ourselves, but rather a simple reassessment of an ever-changing landscape. A word of caution here; the term “analysis paralysis” can enter the process if too much time is devoted to your assessment. Put simply, having an overabundance of information to consider that only creates a circle of indecision.

This sunk cost situation often raises its ugly head when trying to bring new products or services to market. For example, we might find:

• Its too expensive to bring to market
• It will take too long to develop
• It is for a different set of customers, not for your loyal customers
• We do not possess the expertise to develop
• It takes our focus away from our core source of profits
• Someone else beat us to market
• Or many other reasons

But sunk costs can be found in various other places in your business.  Perhaps the tenacity of one of your employees is costing you in the development of something and you don’t even know it. Knowing that sunk costs can be a problem and that you are prone to it, is key making sure constant vigilance and second guessing is part of your regular thinking.  It is an easy trap to fall into, and it takes real control to avoid and/or get yourself out of.

One last piece of advice I continue to give myself and I offer to others is…

“It is better to end in pain, than pain without end”.

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