I was familiarized with the idea of “sunken costs” during Jason Fried’s 2005 panel at SXSW on How to Make Big Things Happen with Small Teams. I had heard the term before, but didn't entirely grok its meaning until Jason went over a few anecdotes (in the context of small teams, natch). One example he gave is that a small company may buy a new server with the expectation that they’ll need it as part of an upcoming project; however, when it comes to the stage in the project, if it no longer makes sense to use the server, then it shouldn't be used (since the money is gone, either way).
I've internalized this thought process for my personal life, to some extent, but I haven’t really been able to explain it well to others. I ran across an entry in Wikipedia on Sunk Costs which I thought explained it fairly well:
Economists argue that, if you are rational, you will not take sunk costs into account when making decisions. In the case of the movie ticket, there are two possible end results. You will either have:
- Paid the price of the ticket and suffered watching a movie that you do not want to see, or;
- Paid the price of the ticket and used the time to do something more fun.
In either case, you have “paid the price of the ticket” so that part of the decision should cancel itself out. If you regret buying the ticket because you do not think the movie is worth the money then your current decision should be based on whether you want to see the movie at all, regardless of what you have paid for it — just like deciding whether you want to go to a free movie. […]
Or, put another way, here’s a scenario that may have occurred to you in real life. Suppose that you go out for dinner, enjoy the entree, and afterwards order a slice of chocolate cake from the dessert menu. Perhaps your eyes were bigger than your stomach, though and you start to become full halfway through the cake. At this point, there are two ways this could end up — either you will have:
- Paid for the chocolate cake but eaten all of it anyway, or…
- Paid for the chocolate cake but refrained from finishing the slice
Either way, you’ve paid for the cake. So, you may as well base your decision on whether to finish eating the slice on factors other than whether you’ve paid for the cake :).
There’s some… interesting word choice here: “natch”? “grok”?
Are these actually part of your everyday vocabulary?
Hi Adrian! For one reason or another, “natch” is more a part of my written rather than verbal vocabulary. And, while I don’t use “grok” every day, it does come up IRL from time to time.
This is a nice corollary to the “eat our own dog food” mentality– “we bought it, now we have to make the best of it until a new budget rolls around…”, common with big dollar, enterprise software purchases… Hmm…
BTW, I’ve arrived at this same logic with food: “So what if the Triple Chocolate Cake was $6–I’ve had a few bites, they we’re great. Are more pounds worth the ‘loss’ of a few $$”
Well, as far as the Triple Chocolate Cake goes (yum!), an economist would say that there is no “loss of a few $$” since the money paid toward the cake is gone, whether you eat it or not :). So, I suppose the question would just be “Are more pounds worth the taste of eating the rest of the slice?”