How To Make Good Decisions Despite Sunk Costs

"Every moment wasted looking back, keeps us from moving forward." - Hillary Clinton

“It's not about making the right choice. It's about making a choice and making it right." - J.R. Rim

Let's assume that you invested half a year into developing a product.

Six months after launching, there are no sales to report.

Based on all indications, it seems to be more of a want than a need.

You happily started a movie that you had paid for.

After 30 minutes you realized it was uninteresting and it made you feel sleepy.

You got yourself an expensive and lovely pair of shoes, but they're too tight.

It gives you blisters on your feet when you wear it.

The food you ordered is too much for one person - unless you force yourself.

You can't leave it out overnight without it spoiling, and there's no fridge available.

How would you handle the situations described above?

If you are like most people, you will persist because you do not want to lose your money.

These examples show the sunk cost fallacy syndrome.

What is Sunk Cost Fallacy?

People tend to persist in a course of action because of resources already invested, even if it is no longer beneficial. 

This is not always a bad thing, because perseverance is the key to success.

However, this sunk cost effect can be harmful if it causes people to make unwise choices that further harm them.

At that point, it becomes a failure of reason.

What Makes Us Hold On To Sunk Costs?

1. Although we appreciate money, we often underestimate the value of time.

2. As humans, we tend to hyper-focus on avoiding pain and regret, even when it is irrational. Admitting to yourself that "I was wrong" is not easy.

3. We tend to avoid loss after investing time or money, which can make us continue to make poor decisions.

It impacts me just like everyone else.

Two weeks ago, a vendor unfairly charged me $5 for a service that was not delivered.

I spent some good time plotting how to send stinker emails and relentlessly pester them until I receive a refund.

I was fortunate enough to realize that pursuing this would take up many hours of my time, and I had more important things to focus on.

How Can We Overcome the Sunk Cost Fallacy?

If a project no longer makes economic sense, you should stop, regardless of how much time, money or effort you have invested.

However, it's easier said than done.

There are three ways to conquer it:

1) You need to shift your perspective

Change the narrative for yourself.

Rather than saying "I was wrong, " you can say, “I should make a new decision based on new information.”

It's not a bad thing to change your mind; it doesn't signify weakness. It's practical and resilient.

But you need to put aside your emotions and personal ego.

The core of leadership is making new decisions based on new information.

If you're busy calculating the cost of old decisions, you won't be able to make new ones.

2) You need to figure out what your time is worth.

To find your Effective Hourly Rate (EHR), divide your earnings by the number of hours worked.

Your EHR can serve as a quick reference to decide if something is worth your time.

If you make $40/hour and are chasing down a $5 overcharge for weeks with no guarantee of success? It might not be a good idea.

For a year, we invested a lot of time and effort into a new product direction in my startup but saw little results.

We realized that an older product had much higher proven returns on investment and desperately needed more resources.

We decided to temporarily stop pursuing the former and concentrate all our energy on the latter.

After only 5 months, our business growth proved that our decision was correct.

Revisiting the new product with the lessons learned is an option we have for the future, but we can also choose not to do it at all.

3) When making decisions, prioritize future outcomes instead of past investments.

Only consider the future outcomes, not past investments, when deciding between two options.

The investments made in the past are gone forever. They have no bearing on what's to come.

Suppose you have two pieces of land, for instance.

You purchased one for $2,000,000 and the other for $50,000.

Where would you choose to construct a block of 100 apartments?

The correct answer is the land located near the major refinery, office complex, or university.

Not the one in the middle of nowhere.

Is the cost of the land relevant to this decision?

Your guess is as good as mine.

Closing Thoughts

Tomorrow brings a fresh opportunity.

 Life doesn't work by jumping from one thing to the next when things get tough.

However, not being able to walk away from a failed project is selling yourself short.

Opportunity cost exists in everything, whether or not you realize it.

Future economic decisions are not influenced by past expenses.

Future decisions are not influenced by past profits either.

It's true, even though it may be hard to accept.

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