Sunk Cost

Don’t throw good money after bad.

Imagine you’ve sunk $100,000 into a project. Another $10,000 and it will be completed. But market conditions have changed and you’ll only recoup $25,000.

A colleague discovers an open-source code that will generate the same $25,000 return for an investment of only $8,000 total.

Do you go for the first option and complete the $110,000 project?

Or do you abandon the $100,000 and go for the cheaper new alternative?

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The rational businessperson chooses the second option. The $100,000 is a “sunk cost.” It’s water over the dam. You need to make decisions based on incremental costs and incremental rewards. Paying $8,000 to get $25,000 beats paying $10,000 to get $25,000 any time, anywhere.

Posted by Jay Cross at March 8, 2002 07:19 PM | TrackBack