Sunk costs are the investments we make into something which can never be recovered. The problem is: People have a hard time cutting their losses. Think of a home that is beyond its years and value. We keep dumping money into it year after year with the hope that all our hard work will finally pay off. That we'll finally receive the investment we deserve.
Economists think of this in terms of dollars and cents; however, many of us may also see this with relationships in the currency of emotions. We’re so emotionally invested in something that we can’t give it up or let go. By holding on to the emotional connection with the thing, we fall right into what economists call the “sunk cost fallacy,” an expense from the past that cannot be recovered.
You can see this with employees who stay too long at a job. With leaders who keep an employee in a certain role too long. Or with organizations who continue to use the same broken processes year after year. We continue to invest, not realizing we’re no longer receiving the payoff we want.
Why do we do this?
As emotional human beings, it means we would have to admit that we made a mistake. That we need to take a new path. That we need to make a change. And none of those are typically fun or easy.
So how can we steer clear of this trap and move ahead in a new direction? Here are four ways to conquer sunk costs and discover new opportunities.
Acknowledge the situation
We fall victim to this fallacy because we are emotionally tied to what we've invested in. It could be money, time, actual work, or other resources we have committed in the past. The most important step to freeing yourself from continuously making poor decisions is to recognize that you are stuck in the trap. Simply being aware of it will help you tremendously in making more rational decisions in the future.
Write out your pro and cons
Write out a pros and cons list on the trap you're in. By doing this simple task, you're able to look at the benefits (pros) of what you're doing compared to the costs (cons) associated with it. Then evaluate whether you're receiving the right tradeoffs associated with continuing on your current path. If the only pro of continuing to do something is that you feel emotionally better about the investment you’ve made, perhaps you should go in the other direction.
Conduct a redo
If you could go back in time and hire an employee, would you? Would you have accepted the same job if offered it again? Would you keep following the same process you've been following for so long? Visualizing a "redo" can help you decide whether you would consider moving forward if you knew everything you know today. And if you wouldn't say yes to the redo, then why keep moving forward?
Recognize what you have
Sometimes we don't want to give up because we worry we won't have anything else available to fall back on. More than likely, that's not true. It's important to think about and recognize not what you're walking away from but from what you already have surrounding you.
Chances are, if you're stuck in a sunk cost fallacy, you are missing out on other opportunities that could bring better value. We become so focused on the emotional attachment leading us nowhere that we are giving up the possibility of other opportunities (relationships or work). Recognize possible opportunity costs because of your commitment to a past decision.
This blog originally posted on the FirstPerson Advisors blog at www.firstpersonadvisors.com. Find more helpful information, including Mike's newest book The Success of Failure, at www.mikebensi.com.