In business, there is something called a sunk cost. This is a cost that has already been paid and cannot be recovered. The most important thing I learned in graduate school was to ignore sunk costs. This applies to time and money.
Let’s say you are creating a widget related to film cameras. You’ve invested a million dollars into researching this widget, building the prototype, testing it, etc. It is going to take another $300,000 investment to finalize the product until it’s ready for market. Then digital cameras are invented, so the widget you invented is no longer necessary. The market for your widget is shrinking rapidly. What do you do?
- Finish the project. You have already invested a million dollars and five years in this project. That’s a lot of money to throw away.
- Scrap the project. It will save you the additional $300,000. Yes, you wasted some time and money, but you can’t recoup that no matter what you choice.
The correct answer is B. You ignore the sunk costs. You cut your losses now instead of continuing to invest time and money into a losing proposition.
Let’s try one more scenario…
You were hoodwinked into purchasing a package “deal” from a local real estate school. You purchased the pre-licensing class, review class, exam review book, and special software program. You attended the pre-licensing class, but the instructor was terrible. He wouldn’t answer questions. He denigrated students. And the only reason you passed the class test is because you watched other instructors on YouTube. It is now time for you to take the review class, what do you do?
- Take the class at your original school. You already paid for it. You might waste two days of your life in the review, fail the state exam, then spend more money and time taking it again, but at least you will have gone to the review you paid for.
- Cut your losses with the first school, and enroll in the state exam review at Demetree School of Real Estate. Even though you paid too much for the first package, at least now you are on the right track and will soon have a real estate license.
Of course, the correct answer is again B. Do not let sunk costs, that is money you have spent and cannot recover, affect your future decisions. You make the decision without regard for time and money you have spent and cannot recover. I’ll admit that this is much easier said then done.
Too often, people choose A. This happens so much that is has a name. It’s called the sunk cost fallacy. It’s where we think that the money already spent (sunk cost) should have some bearing on the decision. The question we should ask is, “Do I go to a school where I had a bad experience or do I go to another school?” If we just answered this question, we would make a good decision. But too often, we change the question which result in a second bad decision – one bad decision chasing an earlier bad decision.
It is very easy to think, “I’ve already invested this much time and money into something, so I need to continue doing it.” Pay attention and don’t let yourself make the wrong decision.
Please note that I, Karen Climer, have no affiliation with Climer School of Real Estate. My father, Ron Climer, sold that school in 2014. Since that time, I have had no affiliation with that school. If you are looking for me, you will find me at Demetree School of Real Estate.