“Water over the dam” … “Don’t cry over spilt milk” – “Don’t put good money after bad” Aphorisms from my parents, grandparents and teachers. “Sunk Costs” came later during early MBA classes. And yet it amounts to the same thing. This basic principle of quality decision making, from folk lore to academia, has traversed a long trail. Why, then, many people – including senior executives and our Federal Government – continue to let sunk costs influence their decisions? Pride, fear of admitting failure, stubbornness, company culture, and other factors undoubtedly contribute to the answer.
As a practitioner of decision analysis, the whole idea of sunk costs was embedded in my thinking decades ago. It came to the fore recently when the subject was connected to sports, in this case to the New York Jets quarterback Mark Sanchez. Sanchez has thrown more interceptions in his career than touchdowns. He is contracted to be paid $8.25 million next year, whether he plays or not. Says James Surowiecki in his column “The Financial Page” in the New Yorker (21 January 2013), the Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. “In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision to start him or to trade him.” His conclusion is that “while the Jets figure out whether Sanchez is the best option, they need to forget-forget how much they haveve paid him, how high he was drafted, and even the fact that the head coach has a tattoo of his wife wearing Sanchez’s jersey. All those costs are sunk. Worrying about them will only insure that the Jets are, too.”