Overcoming sunken costs

Aug 7th, 2017 | By | Category: Commentary

Jeff Hough

By Jeff Hough

Life is full of choices—some are big, some small, others with tremendous impact and those with minimal impact. The problem with all choices is the risk of making poor ones.

During a recent conversation with a client, we discussed a roadblock to good choices. The roadblock is the Sunken Cost Fallacy. The Sunken Cost Fallacy occurs when you have invested time, effort and money into something which prevents you from making a change.

For example, you may have spent money on tickets to a future event. When the event nears, something else comes up, causing you choose between the two. The rational mind tells you to go to the event for which you have already paid. Since you don’t want to waste money, you feel obligated to the first choice. Yet the new opportunity beckons you, causing the dilemma.

Whether we are evaluating time, money or relationships, the dilemma always arises when the opportunity to change course arises. Often, because we have so much invested, it seems a shame to walk away. Even though deep down we know it is time to change, we struggle with the decision.

Economists contrast sunken costs with prospective costs: sunken costs look backward; prospective costs look forward. Prospective costs are the costs associated with a new course of action. Even though we haven’t invested in the prospective costs, we tend to treat them like fixed costs. The question then becomes, “How do we avoid loss rather than risk prospective gains?”

We are emotional beings. Learning to work through our emotions is like trying to tame an elephant. Often the elephant does whatever it pleases, regardless of the trainer’s best efforts. The trick is to align the desires of the elephant with the wishes of the trainer. When aligned, they make progress.

In his book, “Living with a SEAL,” Jesse Itzler explains the tenants of the Navy SEAL(s). One, the 40 Percent Rule states that when you think you can’t do any more, you have only used 40 percent of your total capacity. When you think you are finished, you still have 60 percent more to give.

Applying the 40 percent rule to the sunken cost theory changes things. If you apply it, the question becomes how to spend the remaining 60 percent? Do you want to spend it on a failing venture or would you rather walk away and find a better opportunity elsewhere? That begins an interesting discussion.

We fall victim to the sunken cost fallacy for a variety of reasons. Not wanting to admit failure or trying to justify decisions are common examples. These are great examples of backward-looking thinking. Forward-looking thinking frees us to learn lessons that otherwise may remain hidden. The trick to overcoming the sunken cost fallacy and thinking forward is a three-step process.

First, you should recognize the past is just that—the past. Whatever happened, good or bad, is an opportunity from which to learn and grow. You will never get that money, time or energy back, so let it go.

Second, recognize that the future is about choice. You aren’t locked into a future course of action because you made a choice. Will Rogers once said, “If you find yourself in a hole, stop digging!”

Finally, ask yourself if you had to do it over again, would you make the same investment? If the answer is no, then the choice becomes simple. If you wouldn’t, then not changing direction robs you of future opportunities.

Sunken costs are gone. Don’t let the past rob you of investing your remaining 60 percent effort in something better. Life is too short to worry about the past. The challenge is getting on the elephant and riding off into a new sunset.

Jeff Hough is a business author, blogger and speaker in Pocatello.

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