How To Make Better Decisions- Part 2: Sunk Costs

http://www.dreamstime.com/stock-photo-sunken-ship-image4369780Nick and Sarah were in the throes of a difficult decision. They had a beautiful opportunity before them but weren’t sure if they could leave their present situation. They talked and debated and thought some more and could not make a decision. Finally, Nick said, “I really want to make the change but I feel like we have invested too much time and energy to quit now.”

At that exact moment the couple looked at each other and said at the same time, “Sunk cost!” (More on what that means later.)

Nick and Sarah had been in one of my seminars six months before this. We had talked about decision-making and how to make better decisions. One of the tidbits that I shared was, “never base a decision on a sunk cost.” At the exact time when they needed to make a difficult decision the light came on and they realized that they were basing their decision on a “sunk cost.” They shared with me later that that simple insight freed them to make the good decision that they needed to make.

We talked in Part 1 about the need to be able to separate emotions from decision-making. You can’t separate all emotions from your decisions, but you can take some of the emotions out to make more logical ones. One of the most effective ways to do that is summed up in that simple phrase “never base a decision on a sunk cost.”

What is a “sunk cost?”

The definition of a sunk cost is simple but its ramifications are deep. A sunk cost is simply a past cost that is already been incurred that can never be recovered. In other words you have invested money, time, or effort into something and that investment can never be recovered again.

  • The concept is simple but we base decisions on sunk costs all the time.

How many people do you know that are in a job that they hate but they continue simply because it was their major in college?

How many times have you wasted time and effort on a project that you knew would never be successful but you justified it by saying, “I’ve come too far to stop now”?

How many times have you sat through a movie that you hated but you thought to yourself, “I paid 10 bucks so I might as well get my money’s worth”? The problem is that you not only wasted 10 bucks, but also will wasted two hours of your life in addition to the money. A much better decision would have been to walk out of the movie and use the two hours for better purposes.

  • Because we have invested money, time, or effort into something we have an emotional attachment.

That emotional attachment clouds our decision and often leads us to a bad choice. We need to ask, “What is the best decision now, regardless of the sunk costs?”

Time, effort, and education are always sunk costs which can never be recovered. Because of that, if we ever hear that little voice in our head say, “I can’t stop now because I’m invested too much time (or effort),” understand that you are in danger of making a poor decision. What is the best course of action now, regardless of the time you have already invested?

Think about that the next time you are at the buffet and think, “I’m going to get my money’s worth today and eat way more than I should!”

In Part 3 of this decision-making series we will look at one more practical application that will help us divorce our emotions from our decisions.

Can you think of a time when you based the decision on a sunk cost? Please share by posting a comment below.

2 thoughts on “How To Make Better Decisions- Part 2: Sunk Costs

  1. Brandon Williams

    This is excellent. Wrestling with “sunk costs” was a major challenge when I decided to make a major career shift a few years ago. If I had read this advice back then, I think my decision would have been made much easier.

    Reply
  2. Dale Whitmore

    Very well said, clear and simple. I hope we can always remember and recognize when it is time to cut our losses and move on.

    Reply

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