I was recently introduced to the idea of sunken costs.
A sunken cost in money that’s been expended and can’t be recovered. An example of a sunken cost in business would be as follows;
- You decide to get a shop front and spend money on rent.
- You’ve hired an employee and spent money on their salary and training.
- You’ve hired an agency to do a job.
- You’ve spent money on advertising.
The cost doesn’t always involve money.
You can also have personal sunk costs. When you pay money to get into a club, you aren’t getting that money back however shitty the club is. When you buy a pint of beer and drink the whole thing, you’ve sunk your money.
The sunken cost fallacy is something our brains do to try and lessen the pain of the fact our money isn’t coming back. When we’ve spent £20 to get into a fancy nightclub, we try and look for the good points in it and enjoy ourselves even if it’s terrible. Instead of writing off the money as a bad investment and going to a different club, we spend the whole night at the expensive, terrible club.
Badly spent money and time is never coming back!
What we really need to be doing in life is to understand when we spent money or time on something, and that time or money was badly spent and is never coming back.
I feel like our mid-twenties are the prime time for sunken cost fallacies. We invest a lot into friendships, jobs, relationships and locations in our early twenties. We move to a new city to work, we get degrees, we enter into ‘proper’ relationships and not teenage ones. It’s almost too painful and cringeworthy to accept that actually, I hate living in London, I hate my job and I hate my boyfriend and I need to go somewhere else and start all over again.
The sunken cost fallacy is what keeps us trapped in bad decisions.
- You pursue a job in PR, even if you can’t get hired because you spent a lot of money and time on a degree in it.
- You stay with the person you hate because you’ve been together so long, it must mean something.
- You continue with your business that’s not profitable because you spent money on start-up costs and equipment.
It’s important to be able to accept failure and realise hey, this isn’t working I need to try something else.
If something isn’t working, ditch it, move on. Your money can be recovered in other projects, your time can never be recovered.