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[straregy lesson 1] Sunk Cost Fallacy and How to avoid / get out

The Sunk cost fallacy occurs when you keep spending money or time on something that doesn’t work and never will.

When you’re making business decisions, it’s important to separate yourself from the idea of sunk costs. The truth is that your business can’t thrive if you keep trying to make bad investments work just because of what you’ve already invested in them. When you think about starting a new project, think about the future success of that project and whether it will add value to your business or not, not the time and money you’ve already invested in it.

What is sunk cost?

A sunk cost refers to money that has already been spent and cannot be recovered. In business, the axiom that one has to "spend money to make money" is reflected in the phenomenon of the sunk cost. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs are excluded from future business decisions because they will remain the same regardless of the outcome of a decision. The concept of sunk costs can cause businesses to continue down a path even if it makes no sense economically. For example, if you pay $10 for a movie ticket but decide not to watch it after you arrive at the theater, you have made what economists call an opportunity cost: You could have used your time and money more effectively elsewhere.

Why do we make decisions based on sunk costs?

The sunk cost fallacy means that we are making decisions that are irrational and lead to suboptimal outcomes. We are focused on our past investments instead of our present and future costs and benefits, meaning that we commit ourselves to decisions that are no longer in our best interests. Sunk costs can be applied to employee management as well as other areas of life. When it comes to employee management, managers often fall victim to sunk cost fallacy by continuing to invest time and money into an employee who is not performing up to expectations.

Two reasons why we can't resist sunk costs.

Sometimes it’s hard to let go. Sometimes we get attached to things, people, and yes, even money. But understanding how these sunk costs can fool us into thinking we have more of an investment in something than we actually do can help us make better decisions going forward. Here are two reasons why you should stop letting your past influence your future. They're called sunk costs because they're gone forever, so get over them already!

Employee related sunk costs and how to avoid

Inefficient management lead to inefficient employee, which is acutally a sunk cost generator. By thinking rationally and using your best reasoning ability, it’s easy to see that more people doesn’t necessarily mean higher productivity and more efficiency. Always remember—a correct management will help your employee become effective and avoid waste resrouces out of your capacity!

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