Early this year while travelling I made a decision that almost ruined my evening. I went into a specialty restaurant and ordered a foreign dish, which I had no idea about except a waiter’s assurance that it was one of the best local delicacies.
After a short wait the food came. It was far from my taste and expectation. I had difficulty swallowing a morsel of it. I regretted my adventurous nature that had brought me into the mess I was in. I thought of pushing just enough through my throat to sustain the night.
But then I remembered a lesson my commerce teacher taught me years ago. I paid the bill and crossed the street to another continental restaurant and ordered a pan-fried fish with vegetable fried rice. It was a wonderful meal and I felt at home away from home.
My teacher taught me something called sunken cost fallacy, which influences most of our decisions. In business a sunken cost is a cost that has been incurred and can never be recovered no matter what. It is a past cost that has no present or future economic value.
Sunken cost fallacy is when a person thinks they can profit or at least reduce loss by trying to salvage a situation. For example, I was inclined to continue eating food I did not enjoy to avoid losing the money I had spent on it. This would not have made any positive contribution to my goal of having a good dinner.
Some decisions turn out to be sunken cost. For example, you spend a lot of money on developing a product and discover at the last phase that it does not make economic sense but still continue to the end; you enrol for a programme and half-way you realise it will not add value to your life; you pay for buffet lunch and rather that eat according to your health selections you gulp everything to get value for your money.
In all the above cases you lose out more trying to capitalise or reduce loss on what has already been spent and is irreversible. This is a recipe for more losses. As my teacher emphasised, once you make a decision that turns out to be bad in business or life, forget the loss and move on without delay.
Ignore past sunken costs and consider present and future costs and benefits.
It is not uncommon to find people holding onto a job, relationship or business that they know has no future for fear of losing everything they have already invested in the past. They have already lost!