How to Steer Clear of the Sunk Cost Fallacy
By Jason Rohlf
Many years ago (I’ll stop short of saying how many), I received my Bachelor of Science degree in Accounting from the wonderful University of Illinois. While I appreciated the opportunity to learn what’s commonly referred to as “the language of business,” I must admit that I wasn’t the world’s greatest Accounting student. I think what threw me was the sheer volume of information that I had to retain and apply at a moment’s notice. Most of the students in my program excelled at it; they resembled machines with their ability to consume, process, store and analyze minute data points and apply complex accounting principles quite effortlessly. Sadly, I was no such machine.
The good news is that I did retain some worthwhile knowledge from my Accounting education:
- I can easily grasp the double-entry bookkeeping system, what with all its debits and credits and such.
- I can differentiate between a deferred asset and prepaid expense, as well as extol the benefits and pitfalls of each.
- And I can certainly contemplate the eternal conundrum that is Capitalization vs. Expensing.
All joking aside, I really did benefit from my Accounting degree. One concept that stuck with me was that of the sunk cost. Simply put, once you have incurred a cost you cannot recover, you have experienced a sunk cost. If you listen closely to your Accountant (and you should always listen closely to your Accountant), they will tell you that you should exclude sunk costs from future business decisions as they cannot, by their very definition, ever be recovered.
The problem that we humans run into is that we are prone to the sunk cost fallacy. We tend to continue pursuing ventures or opportunities that may very likely be fruitless if only because “we’ve put so much money/time/effort/blood/sweat/tears into it already.” Instead of recognizing that we are headed into a dead end, we convince ourselves that if we keep slamming our head into a wall, eventually we’re bound to break through it.
In my role at Onspring, I speak with many interesting, thoughtful, hard-working people, and it always pains me to find folks who are stuck in this line of thinking. They may be stuck with processes that don’t make sense, managers that don’t want to try something new, or technology that has gobbled up so much of their time and budget that they can’t even contemplate a change. The sunk cost fallacy dictates that even though it seems to have sprung a leak and is going down fast, you just can’t abandon the ship you find yourself on because you decided to board it in the first place. In a word, you are “stranded.”
The best and only advice I would ever offer to someone who may be in this situation is to resist the urge to stand pat and simply accept that you are stuck. Remember that a sunk cost is just that. You’ll never get it back.
But here’s the good news: There is always an opportunity to rebound, to recover, to change course, to put your losses behind you and focus on the opportunities of the future rather than the costs of the past. Let Onspring help you focus on what’s possible, rather than what can’t be changed.
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