Sunk Costs

Jason Zweig, the Wall Street Journal investment columnist, worked with psychologist Daniel Kahneman on writing Kahneman’s book Thinking, Fast and Slow. Zweig once told a story about a personality quirk of Kahneman’s that served him well: “Nothing amazed me more about Danny than his ability to detonate what we had just done,” Zweig wrote. He and Kahneman could work endlessly on a chapter, but:

The next thing you know, [Kahneman] sends a version so utterly transformed that it is unrecognizable: It begins differently, it ends differently, it incorporates anecdotes and evidence you never would have thought of, it draws on research that you’ve never heard of.

“When I asked Danny how he could start again as if we had never written an earlier draft,” Zweig continued, “he said the words I’ve never forgotten: ‘I have no sunk costs.’”

Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves.

People change, and their goals change with them. This passage from the Psychology of Money [1] hit me like a truck. I have changed so much and my priorities now are so different. Yet, I still cling to past efforts and let them guide decisions for me.

The ability to have no sunk costs is crucial in a world of constant change. I had a conversation with a YC founder about this. We were talking about their ability to make drastic pivots upon product and vision. I asked them how they became bold enough to make those choices. They told me that it was a choice that seems right, and they don’t see it as bold. They made a comment that their immediate network praised them for that ability, but they saw it as normal.

I realized that their team has no sunk costs. They are willing to let go of their previous efforts in pursuit of a new idea, vision, or product.

Having no sunk costs is an asset. It ensures that as you change, you are willing to adjust your goals and priorities.

Notes

[1] Excerpt From: Morgan Housel. “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.”