Fred Wilson (the VC) had a blog post today about Sunk Costs, which is money you’ve already spent on any defined project or business idea.
Since the money is gone, and we can’t get it back, there is no reason for it to be a consideration in our future actions. Most of us, however, irrationally take sunk costs into account when we decide whether to move forward or not.
This thought gaffe is related to a well known tendency we all have called Loss Aversion. Simply put, it’s the mechanism that causes us to place more value on a loss (of say $10) than on an equal gain (the same $10). Loss aversion causes us to make many irrational life decisions such as holding on to losing stocks and even staying in bad relationship.
Here’s an exercise. Look at all the projects or business initiatives you have going. Try to erase the past, and look at them as if they’re starting today. Are they still worth doing? If so, don’t worry about how much time or money you’ve already spent on them. Act rationally, and you will be rewarded.
