The term ‘sunk cost’ is derived from the oil industry, where the decision to operate or abandon an oil well is made on the basis of future expected cash flows and not the amount already invested in its drilling.
If I were to ask my financial colleagues and friends, they would define a sunk cost to be one which has already been incurred, money already spent and therefore partially or totally lost. Importantly, they would tell you that the money already invested should not be considered as relevant to any future decision making.
We’ve all been there before. Whether it be a project, an initiative, a venture or a job, we’ve all had occasions where it’s just not working out, where we’re not seeing the results or getting the satisfaction that we anticipated. And it could be for a variety of reasons. Perhaps our ideas just aren’t unique enough; maybe we just can’t get enough traction with people integral to its success, or able to generate the right level of urgency. Regardless of the scenario, being involved in something which we’ve invested time, money and effort in without results can be a common one. It saps away our energy and can leave us feeling deflated.
The problem is that we often look then to our conditioning, or to our developmental experiences and traditional wisdom for help and guidance. And all too often the advice coming back is, ‘if at first you don’t succeed, try, try again.’ Great advice if what you’re trying to do it to perfect your yo-yoing skills; less helpful if you’re trying to determine whether to keep persisting with a hobby, course or a job which just isn’t working out how you expected.
Alternatively, search online for guidance on whether you should give up or not, and you’ll find quotes such as that by Norman Vincent Peale, which tell us ‘Winners never quit and quitters never win’.
Thanks, Norman. Inspired thinking for my next marathon but less useful when I’m trying to decide whether to carry on operating my (metaphorical) oil well – to push ahead with a project which has already incurred a huge cost with limited potential for any significant returns.
This advice and guidance is well-intentioned and certainly in the right context can be valuable. But to apply that thinking of ‘try, try again’ and ‘to quit is to lose’ to everyday life is a narrow approach and one that is flawed. Successful people quit projects, initiatives, venture and jobs every day – they just do it at the right time and accept that failure is only attained when no learning has been achieved.
The reality is that some of our choices do have a sunk cost. We start something and with the best will in the world, it isn’t going to work out. In these instances, applying traditional wisdom would be financially and emotionally exhausting. Rather than continuing to throw good money after bad or to pump more resource into something which will never deliver a proportional return, the far more intelligent approach is to accept the situation and move on.
There is no failure in pulling the plug, only in not gaining from the experience. So the question isn’t whether you should pull the plug or not, more a question of ‘when’. Get it right and you leave with limited loss but a great experience. Get it wrong and you can leave with financial loss and emotional turmoil.
So when is the right time to pull the plug?
When the benefits of continuing no longer outweigh the future planned costs
Let’s go back to the oil well and take a purely economic assessment of the decision. If what you’ve already invested is sunk then the decision to continue is only determined by future cash flows versus future costs. You can’t do anything about the time/money/effort already spent – it’s gone. Don’t beat yourself up about it – well you can if you want, but it won’t change anything – and instead look purely at whether you will generate a return going forwards.
When your time would be better spent on something else
If you were earning £10 an hour from Project A but could earn £15 an hour from Project B, which would you choose? If it meant pulling the plug on Project A to realize Project B would you do so? Understanding the opportunity cost of the next best alternative can certainly help in knowing when to pull the plug. It sounds simple written down and it is, but the slightly more complex piece is determining what the likely return of the two alternatives would be and having the guts to make the decision.
When you don’t have a unique offering or value proposition
I talked here of the need to offer something different, something better. If you’re not seeing success and you can’t offer something different or unique then it’s unlikely you’ll stand out and you may need to pull the plug. If all you have to offer are table stakes it’s better to take the experience and move on to something you can excel at.
When you’re constantly changing direction with no obvious positive impact
I talked here of the need to have a plan but to be flexible in its execution. In summary, you need to know where you want to go but be able to adjust your thinking along the way. If however the end point, the direction and the tactics continue to change without positive impact, then again, it’s probably time to pull the plug.
When you don’t love what you’re doing or when you’ve lost your passion
This one needs little explanation however it is easier said than done. The footballer who goes one more season that they should because the manager persuaded them; the film maker who makes one more sequel to appease the studio; the author who creates a spin-off just to adhere to their publishing contract. In all these instances, the lack of passion becomes obvious and it isn’t their best work. In hindsight it would have been better had they pulled the plug.
When the first thing you think of when you wake and the last thing you think of before bed is something you’re not doing but you wish you were
These are both usually times when the mind is clear and so you get to view your less conscious thought. They can provide great insight and guidance as to whether you’re on the right path. If you are constantly thinking about ‘something else’ it’s a fair signal you should pursue it and you need to pull the plug.
When you lose sight of the bigger picture or what’s important
Sometimes we become so focused that we lose sight of what’s going on around us. We become fixated on what we’re working on to the detriment of the bigger picture and miss out on other opportunities. Those people who pulled the plug but went on to be successful often did so because they were aware of and open to new opportunities around them.
Don’t think that there is only a single route, that you’re choices are limited to one, or that you have to keep persisting for fear or ridicule from the ‘quitters-are-losers brigade’. It’s too simplistic an approach to apply with often complex decisions.
Often the bravest decision is to call time on the thing that just isn’t working out the way it was planned – because done at the right time, pulling the plug may be the best decision you could make.