Throwing good money after bad or the ‘Sunk Cost Fallacy’ is another form of overspending that we can slip into without realising. It could be the house renovation that becomes the never ending money pit and deep down we know we will never recover these costs when the house is sold.
Sunk Costs are everywhere and they don’t occur only in your finances or business. Have you sat through a really bad movie thinking “oh well, I’ve watched an hour so I may as well watch the rest”. Gottcha!! You have just succumbed to a Sunk Cost.
“In for a penny, in for a pound” my Dad would say, as we headed to the local eat-all-you-want buffet restaurant for a family dinner. “I’ve paid my $25.00 (ok, this was a little while ago), so I am going to get my money’s worth and eat as much as I can”. Over the course of the next couple of hours he was true to his word!
So what is the Sunk Cost Fallacy? Well, in a nutshell: we keep making decisions (monetary or otherwise) based on how much we have already spent on a project. It’s hard to let go of something that is going backwards, or not complete an expensive project even though the cost of continuing just isn’t logical.
“You have to put a stop to this, this business just isn’t going to work, you are just throwing good money after bad and it is jeopardising your other businesses”. This was a conversation I was having with one of my clients.
From my view it was clear that the business was losing a lot of money and throwing more money at it wasn’t going to help it. The rational decision was to stop, sell what we could to recover some of the investment and move on to the next project.
But from the owner’s perspective, he had sunk a significant amount of money and time into this venture and he wasn’t prepared to cut his losses and walk away just yet. Emotions had clearly overridden his business sense and admitting that he had made the wrong decision and lost money, just wasn’t an option.
We get caught up in the Sunk Cost Fallacy because we emotionally invest in the resources, money or time that we have committed in the past and that impacts on how we assess what we are going to do in the future.
Here are some tips to help you recognise and avoid these Sunk Costs.
- Before you start a major project, do some serious planning. Define what you want to achieve, how much time, effort, energy and money are you prepared to commit to the project.
- Set some targets and accountabilities along the way, in other words monitor the project to make sure it is on track and on budget. If it isn’t, pause re-evaluate and make a decision at that point about how to proceed.
- Have someone else looking over your shoulder. It is easier for another person to identify Sunk Costs than it is for you to see through the cloud of emotion, i.e. you can’t see the trees for the forest!
- Be prepared to walk away. You have spent the time, money and resources and now they are gone. Never to return. Get over it and move on.
- Write a pro’s and con’s list. If the only pro on the list is you feeling better emotionally about the project, then stop!
If you want to know more about Sunk Costs, or need help with your money, drop us an email or pick up the phone and give us a call.
Lynda Moore http://www.mymoneyseeker.com