Quitters Sometimes Do Win: How to Recognize and Confront Sunk Costs
My husband and I were sick, and it was raining outside. But we’d bought these concert tickets months ago, so I was determined to go. I mean, we’d already spent the money so not going to the concert would’ve been wasting money, right?
No. As my husband pointed out, regardless of whether we went, we weren’t getting the money back. But if we went to the show, we’d just be miserable and lose a few hours of our night—not to mention the cost of gas getting to and from the venue, which I’d forgotten to factor in. It went against my frugal instincts, but when I thought about it logically, he was right: By going to the concert, we were actually going to be incurring further loss than the cost of the tickets.
We didn’t know the term at the time, but what we were talking about is a sunk cost, and I had fallen for what’s known as the sunk-cost fallacy. As Freakonomics coauthor Stephen Dubner describes it, “A ‘sunk cost’ is just what it sounds like: time or money you've already spent. The sunk-cost fallacy is when you tell yourself that you can't quit because of all that time or money you spent. We shouldn't fall for this fallacy, but we do it all the time.”
This circumstance doesn’t only apply to prepurchased concert tickets, or a terrible movie you’ve already sat through two-thirds of, or a clunker of a car you’ve been repairing for years. It also happens during software development.
Say you’re working on a project, and partway through you realize it isn’t going to work. An entire application is going to have to be rewritten. The trick to prevailing over the sunk-cost fallacy is to make the best decision you can for the future and try not to take into account what’s already been lost in the past.
If you rewrite that application, will it be worth the time you’ll spend? Or will you end up with better utility if you start over from scratch? It’s not easy to walk away from work in progress, but you have to evaluate and be sure you’re not continuing down a path for the sole reason that it’s the path you’re already on. Of course, in these situations, it’s better to fail early if possible.
But sometimes, even after making what seems like the right decision for the future, you can fall victim to “the sunk-cost dilemma.” This is what happens when you correctly ignore sunk costs but continue losing money or time and come out behind. It occurs most often in situations that require you to receive most of your payment after you’ve incurred the majority of your costs—which is common in IT projects.
However, there are ways to try to avoid a sunk-cost dilemma. These excerpts are from the blog Fast Fedora:
1. Break your project into phases, earning your benefit at the end of each phase rather than the end of the entire project. Use agile development methodologies to create value earlier, allowing you to gain partial benefit if costs start to overrun.
2. Build flexibility into your solution so you can pivot into other markets or applications to recoup costs.
3. Increase the frequency of your decision points to identify risks earlier.
Finally, try to recognize early on when you might have to take a loss and back out. This is one instance where “Quitters never win and winners never quit” doesn’t apply.
