Manage Your Money Monday - Drawing the Line on Sunk Costs

How often do you hit the snare of Sunk Costs?


You know this term by a few different words and phrases. "In for a penny, in for a pound" is a common one.
Sunk Costs defined:   

Sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

Wikipedia

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One of the keys here, of course, is the whole concept that the expenditures cannot be recovered. Similar to the scenario in the 1986 movie "The Money Pit," business owners are sometimes distracted from reasonably evaluating future investments by what they have already spent on an earlier bad decision. Thus, they blindly throw "good money after bad" so to speak. They fall into what's called the Sunk Costs Fallacy that leads them to believe it's less costly to continue. Too often, it is in fact less costly -- in the aggregate -- to stop and begin again. 


I actually had someone justify a decision to continue down the same path, who had used this line of thinking. "Understand, I have already spent $XXX dollars. It will be cheaper for me to stay with that." 
It made no difference that the other option was better, less time-consuming, more reliable and a more cost effective solution in the long-run. The net initial out-of-pocket cost was higher -- and that was all that person could see.

What would you do in a situation like this? 

• Would your decision be influenced by what you had already spent -- and could not get back? 
• Would you evaluate your options based strictly upon merits, or would you be unwillingly to admit -- even to yourself -- that a mistake was made?

Regardless of the type of resources committed -- money, time, people hours -- you probably want to take a hard look at total costs when making a decision. Even if sunk costs are involved, make an "apples to apples" comparison. (I had to use just one more cliché).


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