
Sunk Costs - icey
http://blog.asmartbear.com/sunk-costs.html
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notauser
I'm certainly not going to argue against his point, however there's a related
and more subtle one which gets ignored a lot.

Generally if you are writing off sunk costs there are also some accrued
benefits lurking. Before you terminate X you need to look at those.

Examples are things like:

\- Cost of restarting things like advertising in the future from a cold start.

\- Continuity and loyalty benefits from suppliers.

\- R&D realized or in-progress.

\- Accrued experience.

That last one is a biggie. There's a reason that failing companies get new
injections of capital. Quite often their major asset is that they know where
the toxic slime pits in market are - because they fell into them.

So, the money is gone and you shouldn't give it a second thought. But you
probably bought some assets with it (plant, experience, contacts) and you
should think about which ones will diminish of evaporate the moment you stop
doing something.

Revalue these assets in terms of the cash flow you can extract from them,
write off the actual amount spent, and then you have a good basis for making
the decision.

~~~
smartbear
I agree completely. In the real world costs are often NOT completely sunk. I
could even add to your list, e.g. employee morale.

Along your lines of argument, you might say you've INVESTED money instead of
just SUNK.

At the same time, we also tend to hold on to obviously fruitless enterprises.
So the real lesson of course is to try to be objective about what's really
going on, suspending your ego for the benefit of the project. Which I'm sure
we agree on!

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MikeCapone
If you're interested in cognitive biases, heuristics, etc, here are some
resources:

<http://www.lesswrong.com> (start with the "about" and "sequences" pages)

<http://en.wikipedia.org/wiki/Cognitive_biases>

<http://en.wikipedia.org/wiki/List_of_fallacies>

<http://en.wikipedia.org/wiki/List_of_common_misconceptions>

Also check out the books of Daniel Kahneman and Amos Tversky.

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ryanwaggoner
The difficult thing with sunk costs that this article fails to really cover is
that very often we don't know they're sunk costs until after the fact. In the
middle of a situation, it's very difficult to predict whether things will only
get worse and you should abandon your efforts. How many successful companies
and products got off to a rough start and would have been shut down if this
kind of analysis had been applied?

~~~
mikeryan
No this isn't true.

A cost is "sunk" as soon as the money (or time) has been spent. The fact that
a cost is "sunk" shouldn't be confused with determining the value of an
expenditure.

When you start throwing in "value" the whole concept gets confusing.

Sunk costs _only_ mean that the fact that money has been spent on something
should not affect future decisions. What you got out of spending that money
should absolutely be considered in future spending.

