The Fallacy of Sunk Costs: Are Sunk Costs Relevant?

May 29, 2020 - Mark MacLeod

The Fallacy of Sunk Costs: Are Sunk Costs Relevant?

Over the years as CEOs have come to me to talk through difficult decisions involving a change in strategy or direction, I have always asked them one simple question:

Knowing everything you know now, would you still make the same decision?

This could apply to the decision to hire an exec that is not working out, the decision to focus on a particular market, etc. No matter how much time, money and effort you have invested in that prior decision, if you would not make the same decision today, then you know that is no longer the right decision. That means, you should undo it. You should change direction.

Ironically, I had to ask myself that question earlier this year as I wrestled with my own personal direction. As I wrote about in my last post, the decision to wind down my investment bank, SurePath, was a challenging one to the say least. I had invested five years in it. I had sacrificed evenings, weekends and vacations to get certified with securities regulators in Canada and the US in between client work. We had built a brand and reputation. We had a clear, compelling vision that was ours for the taking.

Still this one question cut through all of that investment. All of those sunk costs. I knew that knowing everything I know now about the investment banking industry as well as my personal values and priorities that I would not start an investment bank today.

How to overcome sunk costs fallacy

If I wouldn’t start an investment bank today, why would I continue running one? Because I had invested time and effort in it? What would people think about us shutting it down? Would they say it was a failure? Would they think I was a failure?

None of this matters in the end. Alignment comes when we listen to our inner voice. Our gut always knows. But our rational mind creates complexity that often drowns out the wisdom of the gut.

In this case, I drank my own medicine. I asked myself the hard question. I sat with it. My gut spoke clearly and I acted.

I encourage you to do the same. Follow your gut. Don’t consider sunk costs when it comes to revisiting and confirming or abandoning your most important personal and organizational decisions.

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