On Business Optimization

Sunk costs are the costs that have already been incurred and cannot be recovered. We aren't supposed to consider sunk costs when making rational investment decisions, only the future costs.

But people do anyway. 

How many times have you heard someone say, "Well, since we've already spent this much on it, we might as well finish it." They're making their decision based on sunk costs.

Ideas have sunk costs, too, only they're different from economic costs. When we spend a lot of time thinking about and working on a new idea, it is hard to let go of it in our minds, even when it proves unworkable or unfeasible. So we keep mulling it over and eventually we can become over-invested in it. 

 

And then we can't evaluate the actual outcomes rationally. 

Take the current Health Care Reform debate. Some people have so much sunk into the idea that Health Care Reform must be passed that they want to see anything signed, regardless of what is in the final bill. Others have so much sunk into the idea that Health Care Reform can never be good that they don't want to see anything signed, again, regardless of what is in the final bill. 

Both of these groups are basing their positions on their sunk investments into their ideas of Health Care Reform, and not necessarily on the future costs and benefits of what is actually currently being discussed.

About 12 years ago I worked on a potential new treatment for AIDS. It was a unique molecule that ultimately failed in clinical trials. Since then it has wandered as a potential treatment from one disease du jour to another and failed each time. Recently, I heard that it had been proposed as H1N1 flu vaccine booster, again, with no plausible scientific rationale.

So now it is just an interesting molecule with no proven clinical application or clear rational for using or trying it as a future treatment for anything else.

It is an idea whose time came and went more than a decade ago, yet the inventors just kept trying. They can't let it go, regardless of the fact that the odds for success are much longer now than they ever were. But the accumulated sunk cost of their initial promising idea keeps driving them to continue investing in it. 

"If we only keep trying…"

Sometimes it is useful to deliberately stop and consider if you're continuing to work on an idea because of what you have already mentally and emotionally invested in it or because of its actual future potential.

 

And sometimes the only way to avoid investing more time in thinking about a once-good idea is to just start working on a new and different one.

 

 

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