A common fallacy in business is to keep pouring money and effort into a failing enterprise on the grounds that so much has already been invested that we can’t quite now. These are called “sunk costs” – investment one has already made that won’t be recouped unless the enterprise succeeds.
This is a fallacy, albeit a fairly common one. The amount of cost and effort already sunk into an enterprise should have no bearing on whether or not to keep investing. All that should really matter to a manager are the prospects of success from this point forward, irrespective of past history. If the prospects are good, keep investing.
If the prospects aren’t good, the proper strategy is not to throw good money after bad, but to cut one’s losses and move on to something more promising. To do otherwise is to succumb to the losing gambler’s fallacy that surely if one just keeps playing, eventually one’s luck will turn.
What applies in business applies just as much to personal relationships. Some people hang on to dysfunctional relationships because they have so much history, and they hope that with a little more investment and effort they can make it work, even though years of past effort haven’t made it work.
And it applies to foreign policy. Just because we have committed billions of dollars and a lot of American lives to a policy is not enough in itself to continue that policy, even though it isn’t working. The only valid criteria for continuing a policy is if it appears to have good prospects for succeeding from the present moment forward.
In all these cases, sunk costs don’t matter. All that matters are the prospects for success from this moment forward.
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