Sunk Costs: Watering Dead Flowers – Emotion Versus Business Logic

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Sunk Costs - Emotional Attachments Which Cause Us To Continue To Invest Despite The Apparent And Growing Losses.

 

 

 

 

 

 

 

 

 

 

 

 

Sunk costs are wasted, and often recurring expenditures on a purchase, program, idea or business campaign which, by all rational means is either dead (unproductive) or doomed to failure, Yet we persist in throwing good money after bad either because our emotions or egos want so badly too prove our initial ideas right, or because we have invested such a significant sum that we are irrationally thinking that a few more dollars might “turn it around” – or, as my British friends call it, the “in for a penny, in for a pound,” mindset.

Sunk costs are emotionally unaccepted losses. They represent the triumph of Human psyche over sound business policy. If you have some of theses fiscal black holes embedded in your budget you are going to compromise your subsistence, and possibly miss out on opportunities (the Opportunity Cost is the “if only we could have”: cousin of the Sunk Cost); you will need an objective outsider to identify them for you, and to help you to allow logic to triumph over fragile sentiment. In my practice I’ve disliked having to undertake this repair the most — I invariably have to be as much of a psychologist as a restructuring or strategic planning consultant.

The best way to avoid these anchors to business failure is to learn to draw two lines:

1) What is the absolute maximum you’ll spend, without exception. Limit your fiscal exposure by a rule established early in the game; and,

2) What is the maximum time that you are willing to wait to see a definable, quantifiable result.

If you can establish and live by these two parameters, you and your business will have a far better chance to survive and thrive. I would much rather establish these policy guidelines for a growing company than to have to walk blindfolded through a minefield of voracious pet projects.

Douglas E. Castle

 

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  1. Pingback: How cost factors into the Build vs Buy debate : Learnosity Blog

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