Properly Handle sunk costs

Filed under: Cranky-Michael @ pm

I recently read an interview with a successful start-up business and talked about the sunk cost. So I have some ideas to share with you.

We often encounter this kind of thing. You spent 10 yuan to buy a movie ticket for tonight and are going to go to the cinema to watch a movie at night. When you don't want to go out, the sky suddenly gets heavy rain. What should you do? If you want to watch the movie, you not only need to take a taxi back and forth, but also increase extra expenses. You may also face the risk of getting caught by the rain, fever, and cold, in this way, the cost of taking medicine and injections will also occur. At this moment, you may choose not to watch the movie again. Or you spent 50 yuan to buy a movie ticket, but you are also worried about whether the movie will look good. After watching the movie for half an hour, you confirmed your speculation, at this time, you will consider whether to continue reading it, because it has already cost 50 yuan but it is a pity to stay, or do you want to quit watching it immediately? The wise choice should be to leave immediately, because the key to the problem that cannot be viewed at this time is no longer related to buying tickets for the first 50 yuan spent.

Many people will encounter these similar situations. This is what we often say in Economics: sunk costs. The concept of sunk costs is very useful for enterprise management and financial investment, it is also very beneficial for us to live, work, and study.

I can see the definition of sunk costs in MBA or economics books.
Sunk Costs refer to cost expenditures that have occurred, committed, and cannot be recycled, such as unrecoverable investments caused by mistakes. Sunk costs are a historical cost, which is uncontrollable for existing decisions and will not affect current behaviors or future decisions. In this sense, we should eliminate the interference of sunk costs when making decisions. From the perspective of cost traceability, sunk costs can be either direct or indirect costs. From the perspective of costs, sunk costs can be fixed or variable costs. From the perspective of quantity, sunk costs can be both overall and partial costs. For example, if the machine equipment is discarded in the middle, if it can be sold for sale to obtain part of the value, its book value will not all sink. Only the part whose realized value is lower than the book value will be the sunk cost. Generally, the more liquid, universal, and compatible assets are, the fewer assets are sunk. The concept of "Cash is king" can also be understood from this perspective. Fixed assets, research and development, and special assets are prone to sinks. The division of labor and specialization often correspond to a certain sunk cost. In addition, the sunk nature of assets is time-based and will be converted over time. Taking a fixed asset with a certain degree of universality as an example, if it is not used or abandoned after the depreciation period, only a small part of it may become the sunk cost, and the degree of withdrawal and sinking in the middle will be higher.

With the above examples and professional explanations, we can have a perceptual and rational understanding of sunk costs. It is very important to properly handle sunk costs in specific life, work, and enterprise management.

We often say that "Ginger is still old and hot", that is, only older people have more experience than young people, because they have accumulated a lot of sunk costs in their life experience, with these sunk costs, he can consider being more comprehensive and mature when making new decisions. For an industry or industry, the sunk costs often constitute the key to barriers to entry and exit, and ultimately determine the market structure. According to the company's conclusion, if a fixed or sunk cost of an industry is high, it will become a threshold. Those capital-intensive industries with significant economies of scale and huge hardware investment, such as energy, communication, transportation, real estate, integrated circuits, medicine, and other industries, the excess return is attractive, however, its astonishing initial investment and high exit costs often make many markets "quasi-entrants" discouraged, because this is the first competition of "who can afford to lose. Because these industries with high sunk costs often have the characteristics of low marginal costs at the same time, the "lost" side will eventually become the winner of the market. Many companies with strong capital are using sunk costs to establish their own competitive advantages. Small enterprises can only choose competitive industries with lower sunk costs for development. At present, some fields in our internet industry are like this. "The only one is King" is the best portrayal.

Some people may think that the sunk cost is the so-called "take money to buy Lessons", "pay for tuition", and "free from disaster". Although there are some reasons, however, the correct way to face sunk costs is to have a positive view and a negative view of the problem.

Correct understanding of what has already taken place in the face of success and no cost. Like the movie tickets mentioned above, a wise choice can avoid larger losses when sunk costs occur. Because the sunk costs that have been paid at this time can only bring about greater investment and losses, this is the correct point of view mentioned above.
At the same time, some sunk costs can be reused. I once saw a story about the inappropriate price of 220 yuan for shoes and the price of 20 yuan for new shoes, this is a reasonable reuse of the cost-free model. The result can be understood as spending 20 yuan to buy a pair of new shoes.
In addition, we need to predict sunk costs as much as possible before decision-making, and minimize sunk costs caused by decision-making mistakes as much as possible, because the costs caused by wrong decision-making often cannot be reused, this may also lead to the failure of final decision-making, which will play a major role in evaluating the feasibility of decision-making, because, as mentioned above, some costs are indispensable, this will become a necessary investment and a "barrier ".

In our life, we are always faced with various sunk costs, as mentioned above. due to age, experience, and other reasons, we may make some irreparable mistakes at our age, we have taken some unavoidable detours and experienced some insurmountable setbacks. If we use the concept of sunk costs to understand these things, as long as we learn from these mistakes, learn lessons from detours and setbacks, adjust course direction, and face a new beginning, so as to make our way wider and wider, we may win a new and more active life! At the same time, in the Internet industry that many people share with me, we must always pay attention to and correctly handle sunk costs when starting an Internet business!

[Some content references some professional materials]