Each and every day bad decisions are made. Most of the time, you realize it’s bad in retrospect. A lot of times, you probably don’t.

So what is this bad decision you don’t know you’re making? The sunk cost decision.

Sunk cost is one of the most commonly referred to economic principles. It’s a cost that has already been incurred and cannot be recovered. Think of it as a non-refundable deposit. You’ve already fronted the resources, and there is no getting them back.

People make poor decisions because of sunk costs. Wikipedia provides a fantastic example:

“In the case of the movie ticket, the ticket buyer can choose between the following two end results:

  1. Having paid the price of the ticket and having suffered watching a movie that he does not want to see, or;
  2. Having paid the price of the ticket and having used the time to do something more fun.”

In both cases, the ticket has already been paid for. There is no getting your money back. So the rational thing to do, when taking into account sunk costs, is to choose option two so you suffer in only one way (money spent on the ticket) rather than in two (money spent and time wasted).

The bottom line is don’t let costs in the past affect the future. The future costs and benefits are the only thing that’s relevant.

Alright, so how do we avoid these sunk cost decisions?

1. Don’t look at the past. What you have already spent is irrelevant. You’ve got to forget about it. Look at the future.
2. Evaluate the value. Is what you’re going to spend on something less than or equal to the actual value? Pull the trigger. If not, walk away.
3. Don’t rationalize. “But I already paid X dollars. I might as well pay the rest” Nope. Doesn’t matter. Is it worth more now? No? Move along, friend.
4. It’s not just money. Time is a sunk cost too. Don’t waste more time on something that isn’t going to provide a return or add value.

Your thoughts: Do you struggle with sunk cost decisions? How do you walk away or put things in perspective? What else outside of time and money do you waste in these decisions?

Photo provided by m4roon3d.