Sunk Cost is the idea that once we’ve paid for something, the price we paid becomes irrelevant. But it’s one of the hardest ideas to apply. Don’t we all have that expensive suit in the back of the closet that doesn’t fit right? We paid so much for it that we just can’t part with it?
Let me tell you a story: I own a used bookstore. Buying inventory is a bit like gambling. Book prices can be volatile. When I make my purchasing decisions I consider the profit margin, potential profit, and how quickly a book is likely to sell. (I do love numbers.)
I was considering a book that would cost me $40 with a potential sale price of $200. This was interesting because the profit margins were good; the potential profit was good; but it would probably take more than a year to sell, giving the market price plenty of time to drop. I could lose money here. It was risky.
So, I bought it. Two years later I sold it for $10. And that was a good decision. I told a friend this story, and she said, “I would never have sold it for a loss.”
My friend was suffering from what we call sunk cost bias. The idea that, because we invested so much, we need to stick it out. It’s a common affliction. It keeps us in unhealthy relationships; keeps our closets full of items we don’t use; and keeps our businesses stagnant.
Be aware of your sunk cost bias; consider each situation without regard for previous cost. Create the space that allows your business to move forward. Have fun! And be nice to your bookkeeper.