Are Sunk Costs Sinking Your Ship?
Recently I had a loverly example of sunk costs and making decisions based on the current situation, not on old information.
I was making a food run for my wife on a scale few people appreciate. Rather than running across town for a favorite dish, I drove from the middle of California to the middle of Oregon to bring back 165 pounds of blueberries. (There is a long saga that led up to this point that will have to wait for another time since it is more color than the point of this post.)
In planning the trip, I polled my Facebook friends for interesting things to see on I-5 during my breaks. I also realized I could take the 101 up the coast at the expense of an extra couple hours on top of the 9 hours Google maps was already predicting on I-5. The consensus from fb was to take the 101 if I had the time to enjoy the beautiful scenery.
As I set out, I convinced Gmaps on my phone to point me to the 101 (I should have taken the hint when it was so difficult to get directions that way). It gave me several options between Middlebury and the coast and I opted for the extra 10 minutes to go past Clear Lake and the 10 more to take the far side that looked like it would have a better view of the lake.
Everything was fine as I wound my way through the creepiness that is post-burn Pope Valley and off towards Clear Lake. Then I get pulled over and ticketed for changing audio tracks and appearing to be “using my phone without a headset” — something I had intentionally avoided by digging out an old MP3 player. Needless to say, I wasn’t very pleased with that situation, but took it well enough that the officer thanked me for being so “reasonable” in asking, for future reference, whether it mattered that it was an MP3 player, not my phone. (FYI, he was non-committal and pleasantly said I could contest it if I didn’t agree with the ticket.)
Continuing on, I found myself amazingly neutral about the ticket, but almost instantly wearied by the whole mess. (I really dislike feeling misunderstood.) Driving around Clear Lake I was able to appreciate the view and suddenly realized that I had hit my quota for appreciating natural beauty at the moment. I also realized I was adding hours to my trip (that I now wanted done ASAP) for more views like the one I was no longer enjoying within the first hour of the drive!
Pulling over at the next long turnout, I remapped the shortest route from where I was parked. I was not pleased to realize I had to backtrack a ways before I could get on the shorter route up I-5. Part of me rebelled and started throwing a bit of a tantrum about going back the way I had just come. Thankfully, the more sensible part of me did the math and realized it was an extra couple hours up the coast over the afternoon or 10-15 minutes now (that happened to be anti-parallel with a section of road I’d just driven).
In that moment, I was presented with one of the biggest hurdles we face in making good decisions — the knowledge of what it took to get us to the point of making that decision. These “sunk costs” may be time or money. They may be energy spent or even other opportunities deferred in order to pursue the current path. Or, possibly the biggest one, the commitment and consistency of having previously made a decision and now wanting to stick with that choice as the right choice.
Who wants to question their own decision making abilities?! We would much rather make a choice and follow through on it. Who cares that the “reality” of the situation is different than the assumptions we made in the process of choosing! (Hint: we all should care…because they is always a gap between our map and the territory.)
The most “natural” choice is to just stick with the original plan and make the best of it. Now, I don’t know about you, but that rarely works out well for me — especially before GPS mapping was so prevalent and I thought I knew how to get somewhere based on looking at a map before I left. I have driven many, many miles (literal and figurative) in the wrong direction out of stubbornness over the years.
This time was different. All other things being equal, I wanted to get to Oregon and back as quickly as possible. Most of me had a very clear sense that things had changed and I wasn’t as likely to enjoy the 101 scenery. That made most all those “other things” pretty darned equal.
That meant if I kept going forward and ended up on the coastal highway, it would be a case of shooting myself in the foot (while mixing my metaphors) to spite my face. The logical thing to do was to backtrack to the shortest route — in spite of whatever happened in the past to get me to that new decision point.
I had several moments during my almost 7 years of PhD work where I had to do this same sort of evaluation. It didn’t matter that I was 4 years into it. It only mattered whether the decision to stick it out still made sense. Fortunately, it did everytime I did the evaluation and eventually I got the dissertation written, approved, and defended!
Meanwhile, back at Clear Lake… I took a deep breath, committed, and pulled a U-turn to take the shorter, more optimal-in-the-moment, route. And, after the split second grieving process, I continued knowing I’d made the “right” choice with the new information I had available at that point.
So, what does this mean for you and your business? First off, you need to take the frame of mind that sunk costs are irrelevant. Sayings like “don’t throw good money after bad” are more than cheesy platitudes. If a satellite is in orbit around the Earth and has gotten off course, we don’t care what path it took to get where it is. We don’t care about the complete history of micro-burns needed to get it here. We only care about the current situation (position, speed, remaining fuel, etc) and what actions need to be taken in order to get it back on track.
With that mindset in place, there are a few steps you can take to make these sorts of decisions easier to make correctly.
1. Have trusted advisers. In my driving adventure, I had an adviser that I trusted: Google maps. A satellite has teams of NASA-grade experts crunching the numbers and plotting the course to fulfill their mission goals.
2. Consult them often. Turn by turn directions are great — as long as you listen to them. If you’ve ever made a stop while using Google maps, you know there really ought to be a “pause” feature so the voice prompts don’t tell you to make a U-turn in the snack aisle (even if that is a good recommendation!). Muting that voice in the snack aisle can have disastrous consequences if we don’t turn it back on later. Similarly, having advisers is pointless if you don’t listen when they advise or don’t consult them on a regular basis. When? How about those times we’re about to make a turn (decision) or we look around and realize we don’t know quite where we are now. Which leads us to the next point, …
3. Recognize when the situation has changed enough or is sufficiently different than when you made the original decision/s. Life is full of changes. Ignoring those changes only gets us more and more out of alignment with what is happening around us. A rocket headed for space can’t ignore gravity, no matter how “inconvenient” F=Gm1m2/r^2 may be. Markets shift, technologies change, and life keeps on happening. If we blithely ignore that, we are walking off a cliff and assuming gravity will ignore us back. (It isn’t heights that are the problem, or even falling. It is that abrupt change in velocity when we bounce off the planet that puts a damper on someone’s day.)
4. Have a clear goal in mind. This helps in two ways. One is that it gives us a clear direction to be focused. When we can keep our eye on the prize, we can more easily set aside the distractions to quickly get back on track. If you’ve put together a well-formed outcome, you should already have a step-by-step plan to get you to your goal. And, more valuable still, you will have gone through the planning process and know the territory well enough to navigate around unforeseen obstacles.
The other way a clear goal helps is that it generally has more emotional oomph to it that we can tap into when needed. The bigger and better we expect the outcome to be, the more we will block out those other voices in our head that may derail us further than an arbitrary obstacle. Whenever we turn our energies against ourselves, we are creating “dragons” and they love to take us on a merry ride if we let them! (We shall address dragon slaying and taming another day…)
So, by having trusted advisers, consulting them often, recognizing when we are in uncharted territories, and not feeding the dragons, we are more likely to make clear decisions in spite of sunk costs and reach our goals more easily.
It sounds so simple, doesn’t it!