Stop Making Decisions Off Of Sunk CostsFor most, if not every decision, there is a cost incurred as a result of an action. As I’ve learned in accounting, there are many different…
For most, if not every decision, there is a cost incurred as a result of an action. As I’ve learned in accounting, there are many different types of costs: opportunity, differential, etc. An interesting type is called a sunk cost. It can be defined as “a cost that has already been incurred and thus cannot be recovered.” Sunk costs are things that happened in the past that you can no longer control. You did something. It’s done. There is nothing you can really do about it.
The key takeaway: you can never make a decision based off a sunk cost.
Examples that follow this idea of sunk costs:
- Marketing study. A company spends $50,000 on a marketing study to see if its new auburn widget will succeed in the marketplace. The study concludes that the widget will not be profitable. At this point, the $50,000 is a sunk cost. The company should not continue with further investments in the widget project, despite the size of the earlier investment.
- Research and development. A company invests $2,000,000 over several years to develop a left-handed smoke shifter. Once created, the market is indifferent, and buys no units. The $2,000,000 development cost is a sunk cost, and so should not be considered in any decision to continue or terminate the product.
- Hiring bonus. A company pays a new recruit $10,000 to joint the organization. If the person proves to be unreliable, the $10,000 payment should be considered a sunk cost when deciding whether the individual’s employment should be terminated.
Of course you should spend time learning about your past. Analyzing your mistakes so that you can improve in the future.
But the reality of it is that the absolute best decision you can make is the one in the present. It does not matter if any sunk cost is weighing down on you, do what is best for you/your company/your brand/the people around you TODAY.
It is almost against our instincts to think this way. I always seem to factor dead weight into my decisions. But it is true, sunk costs should not be accounted for — they do not impact the quality of your decision.
Originally published at www.jordangonen.com on October 11, 2016.
Exported from Medium on February 17, 2018.