Probably one of the most misunderstood financial concepts…Wiki defines Sunk Costs as an expense which (A) has already been incurred and (B) cannot be recovered.
Time and time again, people become emotionally compromised by large expenses in the past when making future decisions. The key point of a “sunk cost” is that it cannot be recovered, whether you proceed forward or cancel the project.
This is easier to see in our smaller, personal stories:
- When we were cleaning out her house last week, my grandmother would not let us throw away her $65 electric weed-whacker. She had just purchased it the week before deciding to move, so it was a bigger issue than the $200 lawnmower she purchased last year. In both cases, the money cannot be recovered. In both cases, the tools are no longer needed.
- I just experienced it today with four $1 faucet parts I found in the garage. I resisted throwing them away, even though (a) I have no use for them, (b) I will never find them again, and (c) I can’t get my money back out of them.
The same is true when we have spent $20,000 on last generation equipment that is no longer needed. The same is true when we have spent $200,000 on outdated custom enterprise software. Look forwards, not backwards!
Thanks for listening.