The Money Pit Dilemma and Sunk Cost

Oak Island - A Money Pit

Oak Island - A Money Pit

Imagine, there is a treasure worth $10 million buried at the bottom of a 150 foot hole.  It was put there by someone who does not want anyone else to have it.  There are lots of tricks, traps and other things that make getting to money next to impossible.  Let’s say you have already spend $9.5 million to get 130 ft.  It is the final push, the last 20 feet, but there is a problem.  The final obstacle is going to cost you $700k.  Do you keep going?

In business and economics, the concept of sunk costs is taught.  It should be taught in all disciplines, because, no matter what endeavor you undertake, the dilemma of sunk costs will be encountered.  So, what are sunk costs?  Sunk costs are time, energy and money you have already spent.  It’s the resources you can’t get back no matter what.  The permanence of this unrecoverabilty is very important in understanding the true dilemma of sunk costs.

So, back to the Money Pit.  Do you keep going?  A lot of people would answer, “Yes! Absolutely!  You’ve spent $9 million dollars, how could you stop!”  This is faulty thinking.  Those $9 million dollars are gone, spent, fineto!  There is no getting them back.  The question isn’t what you’ve already put into the project.  The question is, what is the cost of moving forward?  Is it worth investing?  This is the phenomena of sunk costs.  Sunk costs is the investment we’ve already made.  Pyscologically, this past exerition of effort and use of resources increases our committment to the project.  This committment clouds our judgement and often leads us down the path of wasted time, and money.  Instead of giving up while we are ahead, those sunk costs push us further down the path, and we waste more time, energy and money.

Now, that we are aware of sunk costs what is the true decision on the treasure we are facing?  Is $700k worth more or less than the treasure at the bottom of the pit?  Clearly the answer is yes and we should move forward.  If on the other hand we weren’t sure and there was risk involved it might not be the clear answer.  If there was a good chance that no money was at the bottom of the pit, and only small chance of $10 million, you probably should just walk away.

So, next time you are facing a decision, remember.  You’ve got to let the past go.  You can’t get it back and if you let it cloud your judgement then you are going to find yourself pouring more and more money, time, blood, sweat, and tears into a losing proposition.  Don’t believe me?  Read the sad tale of 3D Realms, Duke Nukem Forever, 12 years and countless millions spent with nothing to show for it.

PS.  If you are interested, the Money Pit is a real thing, check it out.

Tags:

2 Responses to “The Money Pit Dilemma and Sunk Cost”

  1. muraTeenunoro May 16, 2010 5:57 pm
    #

    Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian

  2. MrPhil May 19, 2010 11:54 pm
    #

    Thanks! Great to have you.