Friday, October 30, 2009

Drowning in Sunk Costs

The other day I was talking with Kat who had just returned from a conference in New York. Kat was excited and spoke enthusiastically about all that she had learned. In a nutshell, and no doubt inadequately paraphrased by me, Kat had learned about new theories regarding the fundamental causes of Autism and approaches that might successfully address them. At one point Kat was so taken by the implications of these new insights, that she felt as though she knew absolutely nothing about Autism.

Now, to be clear, over the past decade Kat has totally invested herself in understanding Autism and helping families of children with Autism. Not only has she completely immersed herself in relationship based approaches towards autism, but she has also undertaken the deep study of numerous theories as to the causes of Autism as well as the various and often contradictory approaches to Autism treatment. She's made Autism treatment her life. She knows more about Autism and its treatment than anyone I've ever met.

And yet, in the light of her new discoveries, Kat was willing to put down everything she'd learned so far were the new insights to prove more useful or beneficial.

This struck me as the essence of intellectual integrity: the willingness to abandon everything you've done so far, no matter how passionately, in the light of new insight (even if the new insight came from someone other than yourself).

Hanging On to What You've Got
Maybe it's simply the fact that I and the people around me are getting older, and therefore, we tend to have more to lose, but I've noticed that more and more people are less and less willing to take risks... less willing to go for something that could be truly life changing and wonderful... less willing to, well... live.

I've seen this frequently in friends who've "done well" for themselves. They've made money; they've established families; they may even have grand kids.

They may not like their jobs. They may not like where they live. They may not like their partners. But, you know, they've already come this far... They're getting older... They're not sure if they could handle a change or a loss... and so on.

It's strikes me that there are two basic reasons they hang on to what they have although they find it less than satisfying. The first and perhaps more obvious one is the fear of losing what they have. The second, and perhaps less obvious one, is the fear of what change would imply about all they'd done so far.

It's the second one that interest me today.

Sunk Cost Decisions
One of the most common mistakes in business is making decisions based on "sunk costs". Sunk cost decisions occur when you let the time and effort spent on a specific project or task influence your perspective on what to do next. Sunk cost decisions are often accompanied by phrases such as, "We've already invested so much into this project, we can't just drop it and do something else!"

In fact, the astute business answer to that statement would be, "But, of course we can!"

Savvy and honest business people don't look at what has been invested so far; they look at what the costs will be going forward. If you find a new alternative that can get you where you want to go more quickly and less expensively than your current initiative would, you go with it. No question.

The reason I threw in the word honest is that there are savvy business people who will still go with the sunk-cost decision because they don't want to get saddled with having made the wrong decision. Avoiding blame (even blaming yourself) and fear or embarrassment are other reasons for sunk cost decisions.

Sunk Cost Lives
Sunk cost decisions are even more prevalent in daily life. When we stay to watch the whole dreadful movie because we already paid for it... sunk cost decision. When we plow more money into a hopeless automobile because we've already spent thousands on repairs... sunk cost decision. When we stay in a career we don't like because we decided at eighteen to spend our parents savings on a specific college curriculum... sunk cost decision.

I imagine that you can think of times when you've said something like, "Hey, we've come this far already, we might as well keep going."

Looking at sunk costs not only leads to really bad decisions, it also artificially limits the choices that we consider. We not only make a bad choice, we don't even consider the best choice.

The Greater the Cost
If you've read many of my blogs, you might read references to my dad who, through expert use of anger, frustration, self-righteousness, malcontent and alcohol, may be the king of self sabotage. Still, over the past ten years,  my dad has managed to completely free himself from anger, frustration, self-righteousness and alcohol to become downright contented and happy! least for a period of time, and then it slowly falls apart.

Dig Your Own Hole
The thing that's amazing about this is why it falls apart. It's not that my dad doesn't get it. He understands that how he feels is really up to him. He also understands that how others feel is up to them. He even understands that our lives' purposes are defined by us, not discovered.

And yet... Just at the point when he seems ready to really run with his new found freedom, he starts to consider the implications to every decision he's ever made. For example, what if all these years, he could simply have decided not to drink? All those destroyed relationships and lost days! What if life just is and all meaning is that which he ascribes to it? What would that mean about all the years that he spent going to church and studying the bible? What if he could have been a medical doctor rather than an electrical engineer? Did he completely waste his career?

As he considers these questions, everything slowly unravels. It's not that he's calling into question his new insights; he truly believes them. However, he simply can't tolerate the implications of his new insights; he's invested too much of himself into where he is. The sunk costs are too high; he retreats.

And then everything goes to hell.

Achieving Escape Velocity
I can remember the time that my dad came closest to breaking through. He was 76 years old and doing really well. He had a new girlfriend whom he adored. He was traveling. He was happy! He was even funny!

One night, he started playing the sunk cost game and I said to him, "Dad, I hope that the remaining years of your life are so amazing, so exciting, so engaging, that you completely forget everything that happened in all the preceding years of your life."

To be clear, it was not as though my dad was laden with responsibilities. I was the only one of his kids that would talk to him or return his calls. He had no debts or commitments to fulfill. His past friends weren't anxiously awaiting a visit.

I could see the gears turning as he considered the possibilities. I watched him taste the freedom. I swear, he seemed to sit taller as the burden of the sunk costs fell away.

And then... Sigh.

Are You Drowning in Sunk Costs
In business, considering sunk costs is just bad business. If you're a business person, you may want to consider decisions you or your organization has made based on sunk costs and revisit them.

By extension, in life, considering sunk costs is just bad living. If any of what I've written resonates with you, you might want to start looking at your decision process and identify the sunk cost components. Start with the easy ones: eating the entire terrible meal because you paid for it... throwing good money after bad into a wreck of a car... keeping your kids in a specific educational program simply because you've spent so much on it already.

Once you've tuned into the sunk cost model, you might want to consider bigger life decisions or your general life situation.

How much of who you are and who you're becoming is due to sunk costs? Your career... Your location... Your friends... Your house... Your partner... Your religion... Your politics...

What would you do differently if the sunk costs didn't matter?

They don't!

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