Can you think of times when you’ve carried doing something, just because of all the time, money and effort you’ve already put in?
What are sunk costs?
A sunk cost is any cost that you can’t recover; either in money, time or effort.
It’s spent. It’s done. It’s in the past. You can’t get it back and you can’t change it.
We often stick to decisions, strategies, employees or projects that don’t make sense anymore, just because of the money, time and effort we’ve already spent.
How we make decisions
We base decisions on what we’ve already invested, be it time, money or just sheer mental effort.
Being emotionally invested in a project means we might not be using laser logic when it comes to making those decisions.
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 differently.
And because all decisions involve some uncertainty we’ll often cling to what we’ve already put into something, into what we already know, 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’d invested heavily with sheer effort, long hours, money and my health, and it was hard to confront the reality that deep down it wasn’t what I wanted for 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!
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.
Get a fresh pair of eyes, someone who wasn’t the original decision maker on the project.
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.
Maybe you recognise these sunk costs?
- Staff – keeping someone in your team who you know isn’t going to make it, who isn’t a good fit, who isn’t performing, 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 a hefty recruitment fee a few months ago (yep, done that one too).
- Software – you’ve bought it, spent time on training, had it tailored to work for you. Except it doesn’t really do what you wanted it to do, and yet you still keep using it just because of 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 it anyway, rather than face the uncertainty of a new direction.
- R&D – time and money spent on a new product that just isn’t going to 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 if the only reason you’re still doing it is because of what you’ve already put in.
It might just be time to get over it and move on.