Tiny MBA #3: Sunk Costs And Sandcastles

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Welcome to today’s TinyMBA topic: sunk costs.

Definition: Sunk Costs

A sunk cost is something you worked on in the past that’s no longer useful, and that you need to give up on, even though you may still be emotionally attached to it.

Story: Underwater Sandcastles

Say you’ve been at the beach all day, and your parents tell you have just one more hour to keep building sandcastles.

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Illustration by Madeleine Kelly

You must decide which sandcastle to work on in this final hour. That amazing one you worked on all day, that’s now getting swamped by the rising tide? Or a totally new one higher up on the beach?

It’s tempting to just keep working on that half-underwater sandcastle, even as it gets destroyed by waves. But that one is a ‘sunk cost’ – great while it lasted, but not going to be very fun to work on now. You probably should walk away, and enjoy building a new castle somewhere else.

Here’s why sunk costs are important to understand:

– They’re everywhere in business (and in life). Often you have to decide whether to spend more time or money on something, or just let it go and focus on something new.

– You’ll always do better if you can put the past in perspective, and make unemotional decisions based on the present. But this is hard to do because most people have emotional attachments to the past.

– Recognizing a sunk cost isn’t always easy, and takes clear thinking. What do you really want right now, and can something you’ve already invested time or money in really give you that? Or it best to start over?

You won’t hear this ‘sunk cost’ concept very often, even in the business world. But I like it because it’s a useful in many different situations.

Tiny MBA is my occasional series of short stories illustrating business concepts for kids.

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