Remembering sunk cost and opportunity cost on Memorial Day
May 27th, 2009 by binnur
Nothing like a beautiful weekend and a cluttered garage to highlight the importance of understanding sunk costs and opportunity costs in a good decision making process. Head over to AskDong.com for a clear description on sunk cost and opportunity cost. At the same time, realize that though definitions maybe clear, to err is human.
I don’t like clutter in my house. However, I do value the idea of establishing a clutter zone in the garage that holds our donation and potential garage sale pile. This Memorial Day, it was time to clear up the pile and organize it. As we started to sort through the pile, our discussion quickly turned to opportunity cost analysis of whether to hold a garage sale or not: would it be worth spending a good weekend (lets be honest, those are rare in Seattle, WA) by cleaning, tagging and waiting for a possible sale and making a few bucks?
Framing issues from the perspective of opportunity costs can simplify the decision making process. However, letting go can still be a challenge — wouldn’t someone pay $$ for that stuff that cost me $$$??? Whatever the previous investment or expense may have been, the feeling of being invested in the past makes it difficult to change tracks. Many projects follow this trend of throwing good money after the bad.
Regardless, acknowledge and accept the sunk costs as sunk. Put a check for a failure and celebrate your learnings. And, establish milestones for regularly scheduled reviews with clear guidelines on funding expectations to avoid unpleasant surprises.
In case you’re wondering… within 2 hours the garage was cleaned and everything in the pile was donated to Goodwill. Yet, we still had time for a 5 mile hike in the woods that afternoon, and not to forget the wonderful feeling of free space next to the car in the garage.
