Good decisions (and sunk costs)
An anonymous friend sends you two tickets to Hamilton, showing on Broadway tomorrow night.
On your way to the show, someone offers you $2,000 for the tickets. If you don't take the money and go to the show instead, how much did it cost you?
Or, consider the opposite:
An anonymous friend sends you $2,000.
You go for a walk in New York. On your way, you pass the theater where Hamilton is playing. You offer someone $2,000 for two tickets. If you end up buying the tickets, how much did they cost you?
It's pretty clear that the answer is both situations is exactly the same.
We make decisions (about what to do and what not to do) every single day. And we lie to ourselves all the time about costs.
If your team has been working for a year on a new project, and two weeks before your (expensive) launch, someone comes out with a competitive product that's better and cheaper, it means that it will cost you millions of dollars to fight your way to decent market share. Should you launch?
What if your team had only been working on it for a week?
Past expenses have nothing to do with future economic decisions.
Past profits have nothing to do with future decisions either.
That's not easy to embrace, but it's true.
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