Sunk cost is a simple economic concept that we ignore. The idea that “resources already spent cannot be recovered” seems simple. You cannot “un-spend” money or time. We intuitively know this and yet, we constantly don’t follow our own advice.
10 years ago, Google started Orkut, ostensibly the first social network before facebook. According to wikipedia it was founded about 2 weeks before facebook. Hugely popular in Brazil and India, it was not long before the facebook juggernaut caught up. Facebook right now boasts 1.2 billion (billion with a B) users.
As consultants, this is important for two reasons: 1) clients often have legacy organizational structures, IT systems, vendor relationships and other vestiges of the past that prevent them from moving forward 2) consultants need to know when to stop activities that are not helping them win. In summary, we need to know when to let it go.
Don’t cry over split milk is a common expression you learn as a kid. The past is the past. Stop pouting, and move on.
Don’t put good money after bad. Expert poker players and investment managers probably know this better than anyone. Money invested (in the poker hand or stock) is money already spent. It should not affect your next decision.
Last week, I heard someone say they would sell their house when they get the price they paid for it. Silly. Anchoring to the past. The market does not care what you paid.
Don’t be afraid to quit something that is failing. Sticking with something that you know is failing is, um, stupid. Seth Godin talks about the power of quitting in his book, The Dip (affiliate link). A fascinating interview he did with Guy Kawasaki here.
[Guy] Question: How can a company quit a product and not give the incorrect signal that it’s quitting the market? [Seth] Answer: Tactics change all the time. Losing organizations embrace tactics because they’re not flexible or brave enough to embrace strategy. Smart organizations are clear and loud and vivid about their strategies and the market forgives them—endorses them too—when they change their tactics on the path of getting there.
You should finish what you start. This is usually good advice, but not always. As consultants, we should use data to help us make good decisions. Understand the trade offs, and the opportunity costs. See the potential risks and pitfalls. Anticipate the “dips” and tough areas and press on.
However, if we start something that is failing. . . understand why it is failing, and don’t believe it is worth salvaging. . . the faster you quit, the better. Cut your losses.
Real life examples from my consultantsmind life. . .
- Started out in sales as a financial consultant. Liked the idea of it, but my heart was not in it, and that showed. Got 90+ clients and $4MM in assets under management, but that is not the stuff of wall street careers. Quit.
- Started another blog (same time as this one). After 4 posts. . .stopped
- Have a tenant in a rental property. After many emails, texts, phone calls about late rent. Tenant was not communicating, not trying. . . started the eviction process.
- Invested in HOGS, what I thought would be a smart investment in China’s growing appetite for meat products. . . great growth stock right? No, it went sideways for years. Held on to the stock for way too long. Did not think about the sunk cost.
Question: Should Google has waited 10 years to cut their losses on Orkut?