One night, you spend $7 to watch a movie. Half an hour later, you find the movie is terrible. Would you leave the cinema right now? Or you choose to stay till the end because you have spent $7 on the ticket?
Think about another scenario. You have a boyfriend. You two have been in relationship for almost 5 years, but you are not happy because he is bad-tempered. Do you want to break up with him? Or just get married because you’ve spent 5 years with him?
Here we have to mention the concept of sunk cost.
A sunk cost means money or time that has already been spent and which can’t be recovered.
The $7 and the 5 years are the sunk costs.
In business, the idea of “spend money to make money” is reflected in the sunk cost. A sunk cost is not like the future cost that a business may face, for example, the inventory purchase costs or product pricing. Sunk costs are those spent in the past, which should be excluded form future decisions.
However, we find ourselves hard to make decisions without thinking about sunk costs. For the movie, though you think it’s terrible, you’ve spent money and time on it. It makes you feel as if you lost money if you don’t watch the entire movie.
Regard to the second example, if you break up with your boyfriend, you may think the 5 years spent with him is meaningless. All the memories end up with nothing. It won’t be the happy ending as you wish.
That’s why we always think about sunk costs. Because we stick to our pay. We believe in American dreams, we believe “no pains, no gains”. We couldn’t accept that even we have paid, we feel painful, we still won’t gain.
But that’s what we should learn. Sometimes persistence could lead to nothing. Cutting loss in time is a better way. Sunk costs shouldn’t be the major factor when we make a decision.
Opportunity costs determine the way how you view your present; sunk costs determine how you view the past.
Don’t let the past stop you.