How (Not) To Make Decisions
Posted on December 3, 2009 - Filed Under ideaDRUNK's ideas
Here’s the situation. You paid $25 million for a research study that is supposed to form the basis of your business strategy for the next 5 years. It turns out that market has changed. What should you do? How should the $25 million you’ve invested impact your decision? The answer is simple.
It shouldn’t.
It’s a sunk cost. A sunk cost is an incurred past cost which have already been that cannot be recovered. Because you can’t get that money back, it shouldn’t affect your decision making.
You bought a pair of jeans online. They were $150 and you can’t return them. They arrive and don’t fit. They looks terrible. Do you wear them? Nope. You give them to someone else. You donate them to the Salvation Army. You wear your old jeans from before. Or you buy a new pair. But there are always people who will try to squeeze their way into expensive jeans that don’t fit and hope that people don’t notice.
But people always notice.
You could have spent $25 million or five bucks. If it’s a sunk cost, it shouldn’t impact your decisions. The amount you already spent is irrelevant. What matters is what the benefit of doing what it takes to get back to a strategy that’s relevant to the market.
So ignore sunk costs. And wear jeans that fit.
- Christian
Inspired by a friend’s frustration as well as this article.
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