Ignore Sunk Costs

In his podcast, Akimbo, Seth Godin teaches us how to adopt a posture of possibility, change the culture, and choose to make a difference. Here are my takeaways from the episode.

One of the things that have driven our culture and hardwired into most intelligent creatures is the fact that sunk costs are a real problem. The sunk cost problem is the idea that we stick with something, particularly if we put a lot of time or resource into getting that thing. Sunk cost is something happened before that cost our time or resources, and we cannot get that time or the same resources back.

If we need to make a new decision, how should we take the sunk costs into account? The new decision should be based on who you are and what you know right now. Without considering the sunk costs, will one approach represent a better path for us? We can usually put ourselves in a position to make better decisions by ignoring the sunk costs.

Instead of factoring in the sunk costs into every decision we make, we should consider the sunk costs as a “gift” from our past self to our present self. If a given path is more suited to where we need to go without the “gifts,” our analysis should feel free to ignore them. More often, those “gifts” are completely irrelevant to making any decision about how we should spend our future time or resources.

Sunk costs might add a little bit of historical perspective to what we are doing, but they are not our friend. That is due to our past getting in the way of our future. Smart organizations will sell off or “refuse” that past gift from all the people who built it before, so the future version of the organization can focus on something else. Sunk costs often are not merely an economical choice; they are largely an emotional problem.

We worry about the sunk costs partly because we need to look for a story to justify our decision to others. We need to explain what it means to walk away from our past approach and off to the new path. We desperately want to avoid the feeling of cognitive dissonance. Ignoring the sunk costs means that we are brave and generous enough to forge a new path regardless of what they cost us to do something else before.

Another idea to consider is the idea of a dip. Dips come with all endeavors that are difficult or worth doing. In the search-centric world, when we are seen as the best in the world, we get an outsize reward. The position of “best” and the scope of “world” are all perspectives from the person who will acquire and pay. If ten people are interviewing for a job, those ten people are the whole world in the eyes of the hiring manager. The hiring manager is going to pick the “best” in that (ten-person) “world,” based on the criteria that matter to the manager.

To become the best in the world, we will need to quit many things. We need to walk away from all the cruft that is holding us back. By holding on to the cruft and applying the sunk costs to all decisions, it is easy to become a wandering generality rather than a meaningful specific. What professionals have learned to do is to ignore sunk costs and quit when they had to. We only have a limited amount of resources to invest. Holding on to the sunk costs or not quitting will only diffuse our focus and concentration. Instead of investing in many different things, we need to have the guts to go out on a limb and invest only a few things. We need to dig deep on those few things and do them in a way that helps us get closer to be the best in the world.

The dip is that moment of pain when we feel like quitting. Anything of scarcity and value has dips. If something does not have a dip, it is likely it will not be scarce and thus carries little value. When we are on the path to becoming the best in the world, we need to anticipate the dips so we can see them coming. We should not start a project naively believing there is no dip. What we ought to do is research enough and see where the dips might be. When the dips come, we will be ready to get through them. Those who come out of the dips on the other side enjoy the rewards of having done something that is scarce, and likely valuable to some people.

To get through the dip, what we must do is beginning with the idea of sunk costs. Everything we have done so far is a gift; they are gifts from our past self to our present self. The question we need to ask ourselves are whether those gifts have any bearing on where we want to go next? If not, we leave the baggage behind and instead double down on our present effort because we can see a dip ahead. To prepare for and power through the dips, those are the work that matters. We need to be able to walk away from beliefs or experience that we accepted without thinking about them and make a new decision based on new information. Ignoring the sunk costs leads us to decisions that matter to us and to the people who are counting on us.