Months ago I signed up to do a three day course on something we were thinking of doing. It cost about a grand. We’re now not going in that direction, but do we go on the course anyway and lose three days, or ignore the cost and “waste” that money? I’ve been batting it back and forth for weeks and then I got a timely reminder by way of a blog from Seth Godin last week. All about sunk costs.
What are sunk costs?
A sunk cost is any cost that you can’t recover; either money, time or effort. It’s spent, it’s done, in the past, you can’t get it back and you can’t change it.
We often stick to decisions or projects that don’t make sense anymore, because of the money, time and effort we’ve already spent.
But the thing is, sunk costs don’t matter and they shouldn’t be the reason to keep doing something.
How we make decisions
We base decisions on what we’ve already invested, be it time, money or just sheer mental effort, so we tend not to always be logical because we become emotionally invested in a project. We tend to focus on what we’ve got to lose because we’re wired up to avoid pain and uncertainty, rather than on what we could gain by doing something different.
And because all decisions involve some uncertainty we’ll often cling to what we’ve already put into something, in the hope and belief that one day it will all pay off.
Of course we might also feel like we’ve failed if we just abandon something that isn’t working.
I know I stayed in my last business years after I should have left. I couldn’t bear to think about all those years of work, effort and money I’d invested for it not actually to be what I wanted to do with my life. Which is why it took me a good couple of years to Get Over It and move on!
How we should make decisions – get over it and move on
If possible get a fresh pair of eyes, someone who wasn’t the original decision maker on the project.
Do a pros and cons list. If “what we’ve already spent” is the major reason to keep doing it, you know you’re looking at a sunk cost decision.
Remember the golden rule that sunk costs shouldn’t figure in your business decision. Sometimes it’s just the right time to cut our losses and move on.
These are some examples of sunk costs
- Staff – keeping someone in your team who know isn’t going to make it, but keeping them because of all the time you’ve put into training them. I know I’ve done this myself so many times.
- Recruitment fees – keeping someone on board just because you forked out for a hefty recruitment fee a few months ago (yep, done that one too)
- Software you’ve bought, spent time on training, had it tailored to work for you. Except it doesn’t really do what you wanted it do, and yet you still keep using it just because of all the time and cost that’s already gone into it
- Machinery – something you thought you needed but is now sitting on the factory floor not being used.
- Strategy or project – a business strategy that no longer makes commercial sense but you stick to anyway. It’s easier to stick with what we know than face the uncertainty of a new direction.
- R and D – time and money spent on a new product that just isn’t going work. Learn what you can from it and move on.
But don’t be a quitter
Treating everything like a sunk cost shouldn’t be a reason not to carry on just because it’s difficult or you’re facing obstacles. But just check to see if the only reason you’re still doing it is because of what you’ve already put into it. It might just be time to get over it.