Let’s say you’re driving when you come to a fork in the road and don’t know which way to go. So you pick one and drive on. An hour later you realize you’re going in the wrong direction. What do you do?
Like most people, you turn around. You don’t say “Well I’ve invested an hour in this road, I’m going to make it work. Commitment to my goal will get me there.”
Let’s say you paid for tickets to the theater and the afternoon of the show an old friend from out of town shows up and wants to buy you dinner. You’d rather spend the time with your friend than at the theater. What will be the financial difference to spending time with your friend vs going to the show?
It makes no financial difference at all.
Yet, most people find it emotionally easier to give up the wrong road than to give up the money spent on tickets. Why? because emotionally we don’t understand sunk costs. It gets worse.
Let’s say you invested $20,000 in a machine to make widgets because you want to add a line of widgets to the framuses you already sell. Then you find out that people who buy framuses don’t want widgets. And you realize you might have to spend another $50,000 to find widget customers – and maybe more. Besides that, even if you find them, widgets aren’t as profitable as framuses. What should you do?
Don’t Succumb to the Sunk Cost Fallacy
That’s the voice in your head that says “I can’t stop now or everything I’ve invested so far will be lost.” The truth is it’s already lost. Losing more won’t bring it back. You spent an hour going down the wrong road. Going further won’t get it back. You spent the money on the theater tickets. Depriving yourself of time with your friend won’t put the money in your pocket. Same way with the widget machine.
It’s hard to do emotionally but consider this. Only future costs are relevant to an investment decision. This includes investment in time as well as money. Only future costs. Past costs are sunk. Don’t let them become an anchor.
