When is it time to throw in the towel and walk away from a large investment? The answer is simple: when the ongoing losses outweigh the potential benefits. But of course, that’s a prediction game, a gamble. It’s so easy to keep throwing good money out for bad. And a very tangible risk in making these types of decisions is that you may be just around the corner from making the investment work, from realizing the potential, and yet you may not know it. The problem with hope is that it looks just like false hope until after the fact. Sort of like the wheat and tares–you can’t tell them apart until harvest time.
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.
Sunk costs have been on my mind a lot due to personal circumstances. And given the recent policy change and subsequent mass resignation, these thoughts aren’t just on my mind–many people are undergoing this same type of evaluation process, worried about the risks of walking away, worried about the future costs of staying. I’ve had probably a dozen friends resign over this new policy, and others have been severely shaken. People I would never have guessed have been very directly impacted in ways I could only have imagined. Honestly, I’ve been more shaken by the reaction of those who aren’t shaken by the policy than by the policy itself. And I was definitely shaken by the policy.
Some people have talked about scaling back their investment while remaining in the church. This is an effort to avoid future losses in what they now see as a losing endeavor. This may take the form of reduction in tithing or diverting those donations to other ventures. It may involve foregoing temple recommends or not accepting callings. For some it means full inactivity without resigning.
About two years ago, we opened a business. In many ways running this business has been much easier than our previous corporate jobs. A few years ago I was living in Asia, helping to evacuate foreign nationals during a tsunami-generated nuclear disaster. That was stressful. Running a business is certainly more flexible and far less complex. In some ways it felt like moving from the ocean into a fishbowl. As everyone knows, most small businesses fail. But you open a business because you think you are something special, that somehow you can make this work–you are the secret formula other businesses didn’t have. If it succeeds, maybe you’re right. Maybe you are one special snowflake. But if it fails, well, you were probably just arrogant and deluded.
You start with a proforma, a plan for what your expenses will be and what your revenues will be. You revisit that model over and over again. In our case, we started with conservative expectations compared to others in the same business. And then we revised those projections downward. Then we revised them downward again. And again.
Watching the policy change unfold, I was surprised at how harsh it was. It hit me like a gale force wind to realize the implications to so many people I know. I thought I had revised my expectations low enough, but I was unprepared for just how low this felt.
When you are in this situation of watching your business, trying to get to a break even and beyond, every loss, no matter how small, can feel ruinous. Every win, no matter how small, can cause you to hope. They say that a successful salesperson is like a professional gambler, a person who can roll with losses and keep pulling that slot machine’s arm, hoping for the next big win. Harvard Business Review coined the term the “happy loser,” or “people who actually relish rejection and look for jobs that provide them with opportunities to be rejected.” The thought crossed my mind with this recent policy change that this term may apply to me. Who but a glutton for punishment would keep coming back for more?
All small business owners fit this description to some extent. No matter how much money we’ve already pumped in, every win is a sign that things are turning around, that we have hit the magic formula, a winning streak. In time, like all salespeople, you develop superstitions about success. If I win this next customer, then we’ll be successful overall. If I use the red sales kit, I’ll win it. At the end of each day we tally our wins and our losses, our successes, and our setbacks. Each new day is a sign that we should either stick with it or give up on it.
If we walk away from our business, we won’t realize the potential we had hoped for: early retirement, flexible schedule, working together. But we’ll have other needs covered: steady income, insurance coverage, and we stop the hemorrhaging of our savings account. If we stay in, maybe we’ll achieve our goals, or we may not; what is certain is the future costs that will continue to add up before we eventually win or lose. By now we know what most of those costs will be. But there’s always a chance that something unexpected will hit us and knock us down even further than we projected.
It’s difficult to avoid the sunk cost fallacy described above. It’s too easy to want to stick with something that isn’t working just because we’ve already spent too much on it. We want to recoup our sunk costs by sticking with it, hoping it will eventually pay off. This thinking is what leads to eating stale donuts rather than just throwing them away. We aren’t really enjoying them. We are just avoiding the pain of sunk costs.
In the book You Are Not So Smart, the author points out a few sunk cost fallacy examples:
Sunk costs drive wars, push up prices in auctions and keep failed political policies alive. The fallacy makes you finish the meal when you are already full. It fills your home with things you no longer want or use. Every garage sale is a funeral for someone’s sunk costs.
Sunk costs are why we delay, we hesitate. It’s why we find it so very hard to give up on a losing proposition. We don’t have to decide today. Getting out of bed to face another day of trying to read our future in the tea leaves of minor setbacks and modest gains is becoming tiring. The latest setbacks in our business don’t portend well, just as the latest policy change doesn’t portend well for those with ties to the LGBT community.
It is a noble and exclusively human proclivity, the desire to persevere, the will to stay the course – studies show lower animals and small children do not commit this fallacy. Wasps and worms, rats and raccoons, toddlers and tikes, they do not care how much they’ve invested or how much goes to waste. They can only see immediate losses and gains. As an adult human being, you have the gift of reflection and regret. You can predict a future place where you must admit your efforts were in vain, your losses permanent, and when you accept the truth it is going to hurt.
Unfortunately, life is not a “Choose Your Own Adventure” book where you can backtrack and try it again if you don’t like the ending you get.
My honest opinion, and my friendly advice is this: do it or do not do it. You will regret both. – Soran Kierkegaard
For those who decide to leave and those who decide to stay, I understand. This is tough stuff. For those who are untroubled, keep on keepin’ on. It seems to be a great investment for you. You will continue to do great good I hope. But for those on the fence, I express my heartfelt empathy.