My costs were sunk - what's one more year?
It's funny how certain memories burn themselves into your psyche.
I remember one Christmas Eve so vividly. It was a cold and clear night in outport Newfoundland and I was about 7 years old. I was walking with my parents and little sister to a neighbor's house and had just finished watching Karl Wells on CBC TV where he convincingly described to his viewers how Santa had just received clearance from the Gander airport to deliver presents across Newfoundland.
Of course, as a rational 7 year old (or as rational as anyone could be at that age), I thought that Karl was stretching the truth more than just a little. But as I looked up at the sky that night and - I kid you not - saw a shooting star streak out of sight over the looming basalt cliff behind my childhood home, I was willing to let my rationality slide for one more year.
To my kids, the sunk cost is worth it
My kids still believe in Santa Claus. My daughter, who is 8, is even more rational and logical than I was at her age, yet she is still outwardly committed to the idea that Santa and his reindeer are the real deal.
She is a rarity. For those kids living in countries where Santa Claus mythology is an oral tradition, they usually stop believing somewhere between 6 and 8 years old.
In reality, I know the gig has long been up for my daughter and her belief in Père Noël. My wife and I teach our kids to be critical thinkers and when my little girl eventually asks me directly if Santa is real, I'll respond truthfully. I think she's known Santa isn't real for at least a couple of years but isn't ready to give up her belief in Santa (or other fantastical beings like the Easter Bunny or Tooth Fairy) just yet.
Why keep up the charade? If her rational self is telling her that Santa and his flying reindeer defy what she knows to be true and logical, why still believe?
Because at this point in her childhood, she has more to lose than gain once her belief is busted. She's invested a tremendous amount of energy and love into the idea of this altruistic and mysterious being and isn't about to give that up cold turkey.
And therein lies the reason - investment. Continued belief in Santa Claus, long past an age where doubt has already crept in, is a great example of where a sunk cost can influence a decision, and that's not a bad thing.
In my last article I wrote about how sunk costs and the corresponding behavior of loss aversion can pollute decision making. However, I neglected to mention that there are situations where consideration of sunk costs are most definitely worth it - like believing in Santa Claus!
When sunk costs are worth it - cut Santa some slack
It's easy to take a hard line with sunk costs and how they should never impact your decision making, but it's not always that simple.
Here are three situations to consider when sunk costs should influence how you make decisions:
1. When your value or belief system is involved
Your values dictate how you live your life and run your business. The outcome of your decisions - and goals - are all a result of how your values guide you. At the end of the day, you have to live with and own every decision you make.
If you are a leader who has guided your company to invest in environmental stewardship initiatives, only to see changes to the tax code greatly negate any financial benefit, do you ignore your values and what's already been invested? Probably not. These investments are worthy of your consideration when determining how you will support these initiatives in the future.
2. When you're in the investment valley of death
Morbid name aside, this is the stage of funding for any start up or new project where there's a big initial investment and no profit.
While an ongoing assessment of continued investment during this period is essential, it's usually the grit and perseverance of the entrepreneur that determines success (this is the stage I'm at for my business and I'm looking forward to the other side) and the time to question investment is not when you're in the initial phase of executing your business plan.
3. When the sunk costs are investments in people
There have been a few occasions in my career where I canceled training for someone on my team, often having already paid (sunk) the full cost of their training, just to free them up to help hit a monthly or quarterly target.
This was a huge mistake.
From an economic perspective, training costs can easily fall into the sunk cost category when business needs change. However, I've learned the hard way that the best investment you can make is in your people. It's the gift that keeps on giving and the benefits are much more diverse than just an economic outcome.
In most cases, sunk costs are irrelevant when making decisions about the future…but not always. Just ask my daughter! (Maybe ask her in a few weeks. Let's get through this holiday season first).
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