Sunk cost

I think the idea of sunk cost is a concept that we need to get comfortable with to benefit all aspects of our life. Sunk cost is generally defined along the lines of a cost which has already been incurred which cannot be recouped no matter what we do. Therefore we shouldn’t take the money which is already spent into account when deciding whether to spend more money or cut our losses. An example would be if we have spent £50 on 5 spins of the roulette wheel and lost every time. The wheel does not take the previous spins into account when it is next spun so we shouldn’t be influenced by the fact we have already spent £50 when deciding whether to spend another £10. That is a completely new and separate decision. It is often said that “there is no point in throwing good money after bad” but the concept applies to so much more than just money and we can be mindful of it to our advantage.

10132616828

Sunk cost can also be effectively applied to time. Just because we have already spent 3 hours reading a book which we have decided we don’t like shouldn’t influence us to waste another 1 hour reading that book because we feel we need to justify the 3 hours we have already spent. We can’t get that time back whether we finish the book or whether we don’t so there is no point wasting more time if we don’t want to, better to let it go and turn our attentions elsewhere.

It can be applied to possessions too. Just because we have owned an item for 6 months without using it, doesn’t mean we should keep it for a further 6 months in the hope that we might use it and justify owning if for that first 6 months. We would be better off accepting that we’re unlikely to use it and passing the item on to someone else to benefit from.

The concept applies well to relationships. The fact that we have been friends with somebody for the previous 10 years has no bearing on whether we should continue to be friends with them in the future if we no longer have anything in common. Carrying on the relationship just because we have already invested 10 years is not likely to make it more likely to improve than if we have only known them for one year.

It is often hard to let go of the past and blank it from our decision making about the future but practicing that dispassion can prevent us from making a lot of unnecessary mistakes.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s