Sunk Costs refer to money, time and other resources you spend on a project or investment. They have been “sunk” into your work and as you’re looking to make new decisions now, you cannot get them back.
Here is the general rule of sunk costs. When making a choice between two options, you have to forget about sunk costs and instead only consider the future ones. Forget dollars you’ve spent, hours you’ve worked and time you’ve put in. You can’t get them back and they don’t affect today’s decision. Instead think only about the decision in front of you. Consider the pros and cons. Think about the best return for your money and time now.
Here is the classic example–an investment in your new business.
You’re launching a new company that you hope might be the next big thing. You’ve been funding it out of your own wallet and you’ve been optimistic that it will work out in the end. By now, you’ve spent the past 12 months working hard. You’ve hired multiple employees, contracted a web developer, spent money on bank fees and spent 75+ hours every week trying to turn it into something great. When you add it all up, you’re well over $100K in. That number, that represents your sunk cost. You’ve spent the time and money and you won’t be seeing that again in your Bank of America Account.
Here’s where it gets interesting.
After all your effort, the project isn’t taking off as quickly as you thought. Time is more limited. You don’t think you’re getting the right feedback. The website isn’t attracting enough people. And most importantly, the product needs to be updated for your future buyers, or they won’t buy it. And all of this is going to cost you a lot more cash. You think it’s possible to fix it, but that will take another 6 to 12 months to pivot. You’ll also have to hire another person and spend more money on resources. How do you decide? Should you spend the money? And should you consider past costs?
Under the rule of sunk costs, to make the decision to move forward or not, the money you spent is completely irreleevant. You should only consider the additional cash you will have to spend and the additional value you can create. And if the numbers work out then invest more–if they don’t you pull back.
The same thing holds true in other circumstances too. A project you are leading at work. Time spent trying to win a competition. Time spent trying to woo a customer or a potential significant other.
But it’s all easier said than done. After all, humans are not only tied to their time and money but they also have a tough time forgetting the past. Especially when you’re working hard on something you’re passionate about. When lots of people are looking. And when we think our reputation is on the line.
But conventional business wisdom says you should not include the costs you have already sunk into the project into your decision.
Hard to say that this holds true 100% of the time. I personally believe deeply in the power of understanding the past.
But definitely something to think about.
The crucial moment when you are contemplating something new and daring. You’re out on the ledge and one part of you is ready to jump in and go for it. But another part of you isn’t sure. But you have to decide and time is winding down.
That’s the moment we all have to face at times. Taking a job you really want but that pays less than another one. Finally launching a company that you have been waiting to work on for years, and now you have a glimpse of extra time. Arguing for more salary right then in an employment negotiation the day before you have to decide.
It’s the moment between going big or going home. It’s scary but also empowering. It’s the difference between staying with the status quo or trying to change things for the better.
Despite that, most people get stuck. They don’t speak up. They don’t take the leap. They fear of things not going well just like last time. So they say No. And before they know it the chance is gone.
On the other hand, some people do just the opposite. They ask for more money. They spend their own money to hire someone. They say Yes, optimistic that this time it could be different than last time.
So the question is, what are you going to do the next time you face a moment of truth?
In the end, all the time and energy you’ve spent thinking about, preparing for it, and recovering from last time, won’t do you any good, unless you take action in the moment this time.
Despite what they say, one thing everyone thinks of is finding the perfect match. Businesses looking for new customers. Working professionals looking to get into the right MBA program. NBA teams looking to draft a new star player. And anyone looking for that special someone.
That’s why businesses are willing to spend a lot of dollars trying to find the best customers. Because those customers will not only spend a lot of money but also be advocates and refer others customers.
It’s why NBA teams will dish out a few extra million to not only to get the best player but also to get the player that fits in well with the team. It could take a team from mediocre to NBA finals contender in just one season.
It’s why MBA prep programs focus so much on finding the right “fit” schools and careers. Plenty of people have failed out of top schools while others have been profoundly successful at lower ranked schools.
It’s why employees look hard to find the perfect mentor at their firms. Advocates who help them get good work and make it to the top of their careers.
And it’s why people say no to dating dozens of other people and wait on the one they think is a REALLY good catch. Someone who may not even live in their city.
I heard it put in this 3 step framework my marketing class back in my days at Kellogg. You want to find someone who
- Likes your strengths
- Doesn’t mind your weaknesses, and
- Isn’t well-served competitively
So someone that like the things you do well. Doesn’t care so much about the things are you aren’t that good at. And doesn’t have anyone else like you around.
No matter what the context … find these people and improve your odds at success.
In today’s hypercompetitive ever-expanding world, customers have more choices than ever. More lawyers to call before choosing, more stores to shop at, more websites to visit and more things to choose from.
My firm values its customers. That’s why we have a 24 hour max time to return calls and emails.
So does Amazon.com who has an 8 hour rule with their online customer forms.
One website I recently visited promised to get back in 4 hours.
Because in the end … if you don’t get back fast, rest assured someone else will. And the customer you once thought was yours, will be gone.
So what are you waiting for? Call.
In today’s era, the number of choices is getting way to high. Everywhere we go, we hear more noise, we see more clutter and we get more spam. It happened to me yesterday, when I went out after work to purchase a few shirts. But there were too many stores, too many styles, and too many (pretend) deals. And in the end, faced with too many choices, I didn’t buy anything at all. Instead I felt overwhelmed and went home.
Faced with this challenge, most people respond just like I did. They either don’t buy anything, they buy the cheapest one or they buy the single brand that they know before going on their way.
And this isn’t just true online it’s true in every part of the world. The number of resumes employers have to choose from is higher than ever. The number of lawyers in the world is growing even faster than that. So is the number of Internet coders, book publishers, grocery stores and other things in the world.
So the question is how can any of these places stand out? And what can you do to find what you want faster?
On one hand, maybe everything a store makes has to be better than average. On the other hand, maybe you should figure out how to limit your choices before you start.
We all wish we could do things at exactly the perfect time. Launch a new business right when the world needs your product. Get a job at a new company one year before it went public. Start a movement online when everyone was paying attention. Getting in touch with someone the moment they were thinking about you too.
But I’ve seen it time and time again, where just the opposite happens. People wait, and then they look back with regret because they waited too long. A lawyer waited for the perfect time to respond to a client and the client was not happy it took so long. An entrepreneur sat around on their idea and someone else came up with it first. Someone wanted to inquire about a job, but someone else got hired before you.
I hear people say this all the time, “I am not ready. I’m not sure about this. Or the timing isn’t perfect yet.” All valid points … but all sure fire ways to be too late and miss out.
Being early has it’s price too. Sometimes you lose a little time. Sometimes there is more uncertainty. And usually the cost is higher to make it happen. But that’s okay if you are on to something big. Because the value is higher too when it all works out.
In short, there’s a small price to pay for being too early, but there can be a HUGE price to pay for being too late.
So what are you waiting for? Go.
One of my favorite quotes:
A good plan today is better than the perfect plan tomorrow – George Patton
The word leadership is significantly overused in business school (and in MBA applications). Not only is the concept ingrained in many people’s minds but too many people falsely assume they have what it takes to take the lead.
In business school, too many people try to lead. Sometimes, they they do it when they don’t have enough experience. And other times, someone else is far better suited to lead.
In many cases it may make more sense to follow. To let someone else take the reins, make a decision, and be accountable.
Being a leader when you don’t have the experience can take a team down the wrong path. And leading when you don’t have passion is not only hard but it’s impossible when the going gets tough.
I propose that the best leaders understand the importance of passion and they are skilled at stopping to take the follow. They have the guts to put their egos down, to think about what’s best for the team and to help out where they can. And in the end, not only is it best for them but also for everyone involved.
For the first time this application season, I’m joining Kellogg at a public MBA admissions event. Given my work hours over the coming months, I’m not sure I’ll make all of them. So I hope you’ll consider coming to this one.
College and graduate admissions season is one of my favorite times of year. Applicants are not only visiting campuses, sitting in on the classes and going to info sessions but many are also writing me with questions from all across the world. All in hopes to find a golden ticket into top programs. Well, for people applying to MBA programs, Kellogg School of Management is holding an info session in early October. I’m going and would love to meet all of you there.
The event will be held in downtown Chicago at 555 West Monroe, on Monday, October 1, 2012.
In general, these events are a great chance to mingle with potential MBA students and also a great chance to meet admissions officers and learn more about the school.
Meanwhile, I’ll be there and you can ask me anything–the good and the bad–about Kellogg and any top MBA program.
CLICK HERE to register.
And feel free to contact me personally if you’ll be attending.
See you in a two weeks.
I’ve met MBA students from schools all over the US, who come from every profession. I’ve met early career MBAs fresh out of college and older ones who had big jobs before coming.
And I can tell you this: many of them don’t have much in common. They don’t share gender, job title or income level. They didn’t go to the same college, take the same classes or have the same goals.
Ironically, one thing you’ll notice about MBA applicants is that they all seem to be trying to be the same person. Take the same classes, tell the same stories, talk about the same experiences and submit the same applications. All in hopes to be accepted to their dream schools.
You see the disconnect in all of this, right?
This is bad news is that if you’ve got the wrong genes you are NOT going to make it to the NBA or to the NFL (although I have one friend who figured out how–despite his scrawny stature he still made it all the way). But the good news is that if you want to go to the best business school in the world, become a better leader, and change the way business is done–you can. Because neither your genes nor your job will get your in or keep you out.
Actually, MBAs do have one thing in common. Every MBA made the decision to apply to school and then worked hard to make sure they got in.
… is one of the most power words today. For you. For me. For all of us. Not only does it keeps us from being our best but it haunts us so much that we don’t go after the things that we really want. Or we hide away awaiting the results of something we don’t think we’ve achieved. And the word is …. FEAR!
I’ve encountered thousands of people that battle with fear. They have great ideas but don’t make them happen. They fear being criticized, they fear the idea not working and they fear it’s going to be harder than expected. And they fear it’s not going to work out in the end.
Fear is an incredibly strong emotion–no doubt about it. But fear is also what holds us back. We don’t pursue our goals, personally or professionally. It’s what STOPS YOU from going with an idea at work. STOPS ME from writing a controversial blog post. And stops both of us from taking a risk with someone you like. Because we don’t want to get rejected.
On the other hand, the greatest people are those that can overcome the fear. CEOs that don’t fear losing a job. Athletes that don’t fear getting hammered by the media for missing a shot. And investors that aren’t afraid to lose money on a brilliant new idea.
Easier said than done? Of course it is. After all, I hate rejection as much as anyone. And it’s incredibly easy to not take a chance, or to hide away, because of it. Especially when the stakes are high.
On the other hand, fear of failure can also be overrated. Because less people will care than you think. Millions of smart people have failed before. And sometimes, your idea might just work out in the end.
It’s time both you and me took this advice more often.
“The greatest risk in life is not taking one.” -Old Commercial from AIG
** Here is an except from Tribes, where Seth Godin coined this phrase the F word
A few months ago, I opened up a new account at my bank. The first interaction was great. The employees were helpful and nice. They got me through the process quickly, and even gave me a discount.
At the moment I was happy, but over time the experience has taught me that last interactions might be far more important.
After they finished this job, their service has been worse. They’ve charged me with fees they didn’t explain And last week, it took two hours just to get a few cancelled checks. I was transferred between three departments, all on VOIP lines in South America that were hardly working.
The interaction was terrible. And this is what will stick in my memory. The last interaction. In my experience, it can make or break everything.
Good last impressions are great too. When the Dean of your school sent a personal message over the weekend to help with an important problem. When my realtor left me free cookies on two occasions after closing my condo. When I got a call from someone I was waiting to hear from (sorry readers, no links here!!!)
The good news is that just yesterday, the bank helped me get $120.00 back that was fraudulently taken from my account. And it only took 15 minutes. I was thrilled. Can my bad feelings be changing? Maybe not entirely, but the last impression helped.
In today’s disconnected internet-driven world, last impressions are more important than ever. So what last impression are you going to leave today?
One reason people choose to do something is because you get a paycheck to do it. In fact, it’s the one reason most people do things. It makes sense in today’s world, where jobs are harder to get than ever before. But what’s too bad is that for a large number of my coworkers, it’s the only reason they do things.
Some things are worth your time whether you get paid or not. I know people all across the US that are doing things they don’t get paid for. Running for office, volunteering in high impact roles, joining the presidential campaign, starting a movement, building a nonprofit, and joining dance teams. All for very little pay.
Likewise, some things are worth your time, even if you have to wait to see the benefits. Going back to graduate school, even though you won’t get paid for two or three years. Spending time getting to know someone who you can’t see as much as you’d like. Starting a movement for a cause, even though you’re only inspiring a single person at a time.
Now that you’re thinking about this question, what are you going to do this week? Invest all of your time in something that’s worth your time? Or waste it pursuing something else?
It’s a good question to think about every Monday morning.
You were the best before, but today the rest of the people are catching up. The work used to be easy but now you’re struggling more than ever. She used to return your calls the same day but now she doesn’t.
Quitting clearly isn’t the advice your parents gave you. If you asked them again now, they’d probably say, keep working at it. Persistence pays off. You can do anything you put your mind to.
But in a recent book I read by Seth Godin, there’s also the perspective that quitting is a good thing. Because no one will ever become the best at anything unless they are good at quitting.
When a startup won’t work, you have to learn to quit the strategy and adapt to something else. This is known as pivoting
When your project won’t get traction and you can’t find funding. If you keep working, then you forego the time and energy to work on other projects that might be better.
And when someone won’t call you back. Quitting frees you up to stop worrying. To find other things to do. To stop thinking about them so much – even though it’s easier said than done.
On the other hand, this doesn’t hold true all the time.
Data show that salespeople have to keep going — and not quit — if they ever expect to make a sale. The average salesperson gives us after 5 sales but data show for big purchases that it takes seven calls to make them commit.
Likewise, we’ve all heard of stories of entrepreneurs who only made it through because they outworked everyone else.
And of love stories, where one person had no interest in the beginning but where persistence paid off.
So perhaps the most important decision you can make is to figure out if you should keep trying, keep trying to sell your product and keep calling. I’m making some of these same decisions right now. Maybe you should be too.
What a spectacularly bad piece of advice. I think the advice giver meant to say “Never quit something with great long-term potential just because you can’t deal with the stress of the moment”.
Now that’s good advice.
… apply to law school the same way. They have very similar backgrounds, few years of work experience, focus way more on the LSAT than anything else, and end up choosing the highest ranked school that lets them in. Most of these applicants are smart, no doubt about it. But here is the problem.
Most law school applicants get low LSAT scores at least once, and then become afraid to take the test again. Many never take it a second time.
Most law school applicants spend so much time on the LSAT that they forget about the importance of having a good story
Most law school applicants write lofty essays about making a difference in the world, but nearly every single one wants to work at a big law firm by the end of their first year
Most law school applicants are hyper-competitive and don’t do a good a job working together
Most law school applicants apply to law school with very little ‘real’ work experience but don’t realize this is the case
Most law school applicants are more argumentative than collaborative
Most law school applicants are caught off guard during 1L
Most law school applicants haven’t developed certain professional leadership skills
Most law school applicants get rejected from more schools than they get in to
The good news is that if you are reading this post RIGHT NOW, then you do not have to be like most law school applicants
Every time you are making progress on a big project at work but take a 10-second break to check email. No big deal right? Well, if you do that 100 times a day (most people do), that adds up not only to be a significant amount of time but also a significant distraction.
Likewise, drink a coffee every single day in the morning before work? Or a soda at lunch every day instead of water? A little drink never hurt anyone right? But a year later, what if you add them up side by side against a wall. Over 300 drinks would look at lot bigger now.
On the other hand, when you’re in a race to the finish line in middle of a huge project an extra hour can make all the difference. When you’re struggling through a tough project at work or school, a text message from a your mom saying “you can do it” can light up your mood. And we all know this to be true: even a 15-minute call from that special someone you like can change your entire day for the better.
All of us might be better off if we found a way to keep tabs on these little events.
If we lined up all our emails or coffee against the wall, seeing how many were there might be enough to change your mind.
On the other hand, if you just thought for a second about just how helpful an extra hour or a 15 minute call was, we’d do the same for others.
The deadline to work with my friend Emanuel Pleitez for his campaign for Mayor is On Monday. Please remind any students, recent grads or socially-minded professionals you know to consider it.
Fellows would join an amazing team already on the ground of alumni from schools all over the country, including Stanford, Harvard, UT Austin, UC Berkeley, UCLA, UC San Diego, Michigan, USC, Seattle, UC Santa Barbara, UC Irvine, Cal State Long Beach, Princeton, Yale, UPenn, West Chester, Cornell among others.
Let me know if you decide to apply or want to be connected to the campaign.
See recent press on the campaign below
… apply to business school the same way. They have very similar backgrounds, use the same stories, focus on the same parts of the applications and hope to get into the same schools. Most MBA applicants are smart but here is the problem
Most MBA applicants apply to the same business schools and dont think as much about fit
Most MBA applicants write about making a difference but won’t consider a job in that field post-business school
Most MBA applicants are more eager to get high paying jobs than to do what they are passionate about
Most MBA applicants are persuaded heavily by money when it comes to choosing school and careers
Most MBA applicants don’t focus enough on the essays and overall story when applying
Most MBA applicants talk a lot about leadership roles in their applications instead of leadership experiences
Most MBA applicants aren’t afraid to embellish if it will help get them into school
Most MBA applicants don’t write a clear compelling story about who they are in their application
Most MBA applicants get rejected from more than one school
Fortunately, if you like reading my blog (and not blogs about “odds” of getting in), then you’re probably not like most MBA applicants
… is a dangerous concept. It describes the one thing that we think we want more than anything else. Sometimes it’s a job. Other times it’s getting into school or meeting that special someone. But sometimes can counting on one in a million can be a dangerous thing?
The chances of a high school student eventually playing basketball in the NBA? One in a million (probably worse).
The chances of a person becoming CEO of a Fortune 500 Company: the same odds.
On the positive side, it gives you a WIG to pursue and allows you to go after something you believe in and to give it your all.
On the other hand, many would say that one in a million doesn’t even exist. That multiple jobs that could be your dream job and multiple soul mates are out there–not just one. Further, it’s dangerous to put all your eggs in one basket. You might get nervous when game time comes, have trouble performing, and miss out on other opportunities all because you thought there was only was that was meant for you.
In the end the consistent and extremely focused pursuit of a specific goal is dangerous. It makes sense, when the work you do will also prepare you to succeed in other outcomes. So if you’re taking steps to become a CEO and your school, practice, and skill helps you become a great entrepreneur or Managing Partner, then perfect.
On the other hand, if you ou put all your eggs in one basket and live a life in relentless pursuit of a singular outcome that leaves you no other options if you fail, then maybe you should think twice. If your happiness depends on just one NBA draft five years from now, then that’s giving a whole lot of power to a single event not in your control.
On the other hand, I believe that some things are worth going after: jobs, schools, careers and significant others. So I propose that the closer you are to having a One in a Million, the more you have to stack the deck more and make the game shorter.
I know what you’re thinking. That sounds funny — every person I know has tried at diet at some point. Well, me too. Four people in my family are on diets right now. And they’ve all lost a lot of weight. So let me tell you why it won’t work for any of them.
The reason they don’t work is because the diet has nothing to do with what they’re actually trying to do. The aim of a fad diet is to change the outcome not to change habits. And before long, weight loss (e.g. the outcome) will plateau because you can only lose so much weight. Then they’ll return to eating junk food again when they don’t see immediate results.
You see it happen all year long. Every New Years eve thousands of people spend hundreds of dollars on 30 day diet programs. They purchase memberships at fancy fitness centers so they can squeeze into the new swimsuit in a few weeks. They stop eating for a month so they can look good at their wedding and fit in their wedding dress. They buy special gum as a quick fix to stop smoking in two weeks. They work harder than ever for one month hoping to get that quick promotion. But in the end, they crash. The diet not only doesn’t work but often times it also backfires and you’re worse off than when you started.
But (good) habits are what matter. Habits are what build great careers. Habits are what make Olympic athletes. Habits are what can make you a morning person even when you’re not. And habits are what will help you not only lose weight but also keep it off.
Habits make you better tomorrow than you were today. That’s because the key to becoming world class at anything is consistency not a quick fix.
The only way to stay in shape is to go to the gym every morning.
The best way to get promoted is to stay an extra hour at work every day, all year long.
If you want to become a better free throw shooter, you have to shoot 100 free throws every day this season.
And if you want to win an Olympic gold medal, time to start your training regiment today.
In the end, the secret isn’t some fancy technique or quick-fix solution. Instead, the secret is doing it consistently over time. To lay one brick at a time, which will eventually turn into a wall.
In short: (good) habits > diets.