Sunk Cost — One of My Favorite People Tools

As many of you know, a few years ago I wrote People Tools, a guide for enjoying a happier and more productive life.  That book became a best seller and was followed by two sequels – People Tools for Business and People Tools for Love and Relationships.  One of my all-time favorites is the People Tool of “Sunk Cost,” which is both obvious and counter intuitive.  It is a strategy I have written about before, but it bears repeating because it can significantly improve the quality of your life.

Let me elaborate.

When I was studying accounting in college, the following question was posed.  Suppose a manufacturing company has just installed a new machine at a cost of $2,000,000.  A salesman calls, trying to sell the company a much faster, more efficient machine priced at $3,000,000. Should they consider a replacement?

The easy response is, “No, they just bought a machine that is brand new, and it is working fine.”  But that is not necessarily the more profitable solution.  In business, as well as in our personal lives, we need to focus on the future because we cannot change the past.

So we have to completely ignore the “Sunk Cost” of the old machine and compare the future cost savings and potential profit from each machine.

For example, if the new investment of $3,000,000 will earn back its entire cost in six months and make a significantly greater profit after that, then it is certainly an investment we should consider.  The previous “Sunk Cost” is irrelevant.  Whether the existing machine was purchased twenty years ago, twenty days ago, or twenty minutes ago makes no difference.  It is a part of the past that we cannot change, and this is why a “Sunk Cost” shouldn’t influence our decision.

Another example comes to mind.  Suppose you have just moved to New York to take a new job, and two weeks later your ideal position becomes available – in San Diego.  Would you turn it down because you have just paid to move your belongings across the country?  ”Sunk Cost” says that your past move is makes no difference.  If you think you will be better off, you should accept the San Diego job. Why thwart future opportunity and potential upside because of an expense incurred yesterday?

I also apply “Sunk Cost” to the use of my time.  Just because I bought a ticket does not mean that I have to sit all the way through a boring two-hour movie.

You have now invested three or four minutes in reading this blog, so I hope “Sunk Cost” will be worth your time.

Thanks.

Alan