Sunk Costs

Humans have an irrational, but very natural, tendency to overvalue "sunk costs." In fact, the correct value of sunk costs is always exactly $0.

Here's an example: You've spent $1,000,000 so far, inventing a better widget. You've been working on it for a year. Tomorrow, you will wake up and be faced with this (weird) choice: either spend another $500,000 to finish the widget, or buy a patent from someone for their widget, which does exactly what you want your widget to do, for $499,999.

It is tempting to somehow think, "If I spend the other $500,000, I'll have something worth $1,500,000, whereas if I buy the other widget, I'll have something only worth $499,999." Ignoring the possibility that you've actually created some prototype widgets which, themselves, have value, this thinking is incorrect.

If you forget about tax consequences for a second, it makes ABSOLUTELY no difference how much you've already spent in the past, all that matters is what choices you have NOW, going forward. If the 2 widgets are equally useful, then you can either spend $500,000 to get the widget or $499,999 to get an equivalent widget. You should choose the cheaper option, regardless of whether or not it makes the previous $1,000,000 "a waste."

So, many people have a tendency to throw good money after bad, and to stick to projects that they've already "invested" a lot in, when, in fact, they should usually be ignoring what they have already invested. Even when people understand this concept as it relates to business, though, they often fail to realize that it should apply to all aspects of life. It doesn't matter how much time you've put into convincing someone to act a certain way or teaching yourself a certain skill. All that matters is "What are my options going forward?" A careful evaluation of these options will account for the possibility that "finishing something" is more efficient than dropping it and picking it back up later. For example, it might be "worth it" financially, to quit college and take a job. However, it might be "hard" to re-enter college later, and so it's "worth" losing money now to finish college now. One must be careful not to confuse that with the more sinister, "Well, I've gone this far, I ought to stick with it." That line of thinking is virtually useless.

If it doesn't make sense to be doing something, anymore, you should stop doing it, no matter how much you've invested in it so far.