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What Is A 'Sunk Cost'?

Sunk Costs are investments of time, energy and resources that can't be recovered once they're made. Continuing to invest in a project to recoup lost resources doesn’t make sense - throwing “good money after bad” is not a winning strategy.

Making mistakes is inevitable, and often quitting or changing directions is the best option.

Josh Kaufman Explains 'Sunk Costs'

After returning from World War II, my grandfather started the Kaufman Construction Company, building storefronts, homes, union halls, and apartment buildings in Akron, Ohio. In 1965, after twenty-five years in the business, he kicked off his most ambitious project: a five-story, twenty-six-unit apartment building on Portage Path.

The “Baranel” was to be built on the lot of two older homes, which had been purchased and demolished for the job. Steel rebar and bricks were ordered, and excavation was proceeding as planned. The expected cost of the project was $300,000, roughly $2.4 million in 2010 dollars.

The project proceeded smoothly until the excavators found huge hidden deposits of blue clay, which could make the foundation extremely unstable. To continue the project, thousands of cubic feet of clay and dirt would have to be excavated to reach bedrock, and additional concrete and rebar would be required to fill the massive hole. Completing the building would cost far more than originally expected, but it was difficult to determine exactly how much.

Instead of walking away, Grandpa decided to finish the project — he’d already spent so much money on the land and excavation that it felt wrong to “waste it” without having something to show for the effort and investment. He found a few investors, put up another apartment building and the family home as collateral, and the project continued.

By the time the building was complete, they’d spent over three times as much money than originally planned: approximately $1 million, roughly $8 million dollars in 2010. It was more than the building was worth. Grandpa spent the rest of his career handling angry investors and lawyers. It’s a sad story, but one worth learning from.

Sunk Costs are investments of time, energy, and money that can’t be recovered once they’ve been made. No matter what you do, you can’t get those resources back.

Continuing to invest in a project to recoup lost resources doesn’t make sense — all that matters is how much more investment is required versus the reward you expect to obtain.

Sunk Cost is easy to understand conceptually, but much harder to put in practice. When you sink years of work into a career you realize you don’t want, or millions of dollars into a project that unexpectedly requires millions more, it’s difficult to walk away. You’ve invested so much that it feels wrong to “give it up for nothing.”

In reality, there’s nothing you can do about your past investments — all you can do is act based upon the information you have now.

Making mistakes is inevitable: no one is perfect. You will make a few decisions that, in retrospect, you’ll wish you hadn’t — count on it. If you could turn back time, you’d do things differently. Unfortunately, you can’t. There will always be other projects, provided you don’t double down on a risky project to recoup your losses.

Throwing “good money after bad” is not a winning strategy.

Don’t continue to pour concrete into a bottomless pit — if it’s not worth it, walk away. You never have to earn back money in the same way you lost it. If the reward isn’t worth the investment required to obtain it or the risk, don’t invest.

Questions About 'Sunk Costs'

• Are you throwing good money after bad?
• Is the additional investment worth the reward, or are you trying to salvage an investment gone wrong?

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"If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

W. C. Fields, comedian

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