Whether in business or in personal life, we can all look in the past and say that we’ve been in situations where we’ve wasted money, time, or energy on things that did not end up being worthwhile. Was there a moment during that situation when you thought about backing out before you sank even deeper? The sunk cost dilemma refers to the decision between investing additional resources into an uncertain situation, or abandoning the sunk costs. In this blog, we are answering the question: how should sunk costs affect your future business decisions?
There are controversial views whether sunk costs should affect your future business decisions and be considered in the decision-making process. Take sunk costs into account to prevent the mistakes of future sunk costs. But they should not be the main reason why you stay in a downward-spiraling predicament. Humans have the inherent tendency to deny failure. We fear facing defeat. However, by not facing those failures head on, we run the risk of making the same mistakes in the future. Those who say to disregard sunk costs ignore that sunk costs are a critical aspect of improving your business. Once you learn what NOT to waste resources on and when to walk away, then you can spend resources on profitable and rewarding things.
For example, I met a business owner who had spent a significant amount of resources into a new start-up business. Bit it had been falling in a downward spiral for months. He heard of a new business opportunity that could be implemented quickly and proven very profitable. The business owner asked for my advice. He felt like it was wrong to walk away from the all of the money, time, and energy invested into his business venture.
My first reaction was the following… If his justification for not letting go and moving on to new opportunities was the notion that what he had invested made the venture worth something, then he would acting irrationally and unrealistically. Although his business may have had some value, the worth of the business would not necessarily improve if he spent even more money, time, or energy into it. If he decided to stay in his current business solely based on his attachment to the sunk costs, he would lose out on a higher return on his resources with the new business opportunity.
Next time you are in a similar business predicament, be rational and realistic. Make smart decisions not solely based on your attachment to the resources you have invested until that point in time. Learn from the past mistakes of sunk costs and improve for success in future business opportunities.
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