The Art of Letting Go – Don’t Let Sunk Costs Fallacy Get in the Way of a Good Business Decision

by Jean-Eric Plamondon | 17 Jan, 2025 | Software & Automation

The short answer: Sunk costs are money, time or resources that have already been spent and cannot be recovered, so they should not factor into future business decisions. Future decisions should be based on potential future benefits, not on trying to justify or recoup past expenditures.

“Sunk costs” is a business term that refers to money, time, or resources that have already been spent and cannot be recovered.

The investment is gone, regardless of future outcomes.

Sunk costs should not factor into future business decisions.

Future decisions should be based on potential future benefits, not on trying to justify or recoup past expenditures.

This sounds logical in theory – yet most people fall into the trap of the Sunk Cost Fallacy.

Sunk Cost Fallacy

Sunk cost fallacy is the mistaken belief that more investment (time, money, energy) should be poured into a project simply because a lot has already been invested.

To do otherwise feels like it would waste those resources.

We often hear something like this from clients:

“We spent over $50,000 developing this custom software application. Are you saying we should throw that money away to start a new project?”

Sometimes, the short answer is “Yes.”

Yes, we are suggesting a new course of action.

But we’re not suggesting that you throw away the money.

Because the money has already been spent.

It’s no longer there to “throw away.”

Here’s another way to think about it.

Imagine for a moment that you just bought your company.

One of the big decisions you need to make is about the software that runs orders and inventory control for the company.

You weren’t around when the initial software project was launched.

You didn’t choose the vendors.

You didn’t authorize the budget.

You have no emotional investment in it at all.

You’re simply walking into your office on day one of your new job as owner/CEO of your company.

You have only the current situation to consider.

Right now, the company is running a collection of different applications. These include an off-the-shelf program that is out of date and no longer being updated by the company that produced it, some custom applications created by a freelance developer who can’t be located, and some spreadsheets that are tied in using Zapier.

The company has invested over $150,000 setting up this system.

Your staff has been using some workarounds to get it to function, including entering data into multiple places – which sometimes results in (expensive!) errors. The system is limping along, but now your growth plans call for adding an online store that will need to tie into this system.

You found a contractor who thinks they can fix the existing system and tie this new functionality into it for another $50,000.

Or you can invest $75,000 in a brand new system that is up-to-date, currently supported, and already integrated with the online store you plan to add. A new system that also won’t require your staff to manually stitch together information at the risk of accidentally making more of those costly errors.

Which choice do you make?

What you currently have is software that is not up to the task of running your business.

Perhaps it’s broken or out of date or built from a hodge podge of different applications that don’t talk to each other and consume all of your key people to keep it on life-support.

As a smart CEO, you know that your business needs reliable systems to provide efficiency, consistency, and profitability. You need accurate and timely management reports so that you can make sound data-driven decisions – without bogging your staff down with manually producing them.

And what you have now doesn’t deliver any of that.

You have a choice to make.

Remember, what happened before you arrived are sunk costs, and therefore should have no impact on your current decision.

Common questions

What is a sunk cost?

Money, time or resources that have already been spent and cannot be recovered. The investment is gone, regardless of future outcomes.

What is the sunk cost fallacy?

The mistaken belief that more time, money or energy should be poured into a project simply because a lot has already been invested. Doing otherwise feels like it would waste those resources.

We spent $50,000 on custom software. Should we throw that money away and start a new project?

Sometimes, the short answer is yes: we are suggesting a new course of action. But we’re not suggesting that you throw away the money, because the money has already been spent. It’s no longer there to throw away.

How can I make a decision without the sunk cost fallacy getting in the way?

Imagine you just bought your company. You weren’t around when the initial software project was launched, you didn’t choose the vendors or authorize the budget, and you have no emotional investment in it, only the current situation to consider. What happened before you arrived are sunk costs, and they should have no impact on your current decision.