Sunk Cost Fallacy
Norair Yeretsian
President / Broker of Record at Envoy Capitol Realty Inc., Brokerage
Sunk Cost Fallacy
A sunk cost is money spent that you can not easily recover and the project is no where near achieving the results expected.
And you don’t want to be a “Bag holder”; “an investor who holds a position in a stock which decreases in value until it is worthless.” [Investopedia]
Sometimes it is a wise investment decision to get out of that money costing, money losing investment.
Pouring fresh good money into a bad decision, structure, project, real estate or like our own Federal government’s adventures into the Phoenix payroll system “an incomprehensible failure caused by public servants afraid to tell their political masters when they see a problem”. [ https://www.theglobeandmail.com ]
Just by way of illustration and frustration; “The problem-plagued Phoenix payroll system has already cost the federal government more than $ 1 billion and could require an additional $500 a year until it is fixed, based on the government’s latest estimate.” [www.theglobeandmail.com]
Business schools will have case studies written about this classic case of sunk cost fallacy and the many layers of incompetence (almost criminal) and waste of Canadian taxpayers’ money.
However this is not just a public sector problem, the private sector and investors suffer from the sunk cost fallacy.
You hear this in organizations where lots of time + money is invested in a project and that is the reason nobody is brave enough about standing up and saying that’s enough.
It stops now !
Why do you have a better idea they ask?
No we should keep on burning money until we find one.
Really?
Why do we do it ?
Invest first and ask questions later, due diligence later and humanly try to justify our decisions.
When should we reassess the situation/the project/the investment and determine that it is just better to scrap it and begin a new.
Fresh start from the beginning and not have the old system corrupt/compromise our design and decision making.
The new, fresh idea/design may appear to cost more up front but more economical, efficient and works from the start instead of monkeying around with temporary patchwork fixes and capital.
Think about it. [ Hope I am making you think…]
When the end is not insight and a better operating system, a proven system will result in a better and improved ROI you should move to the better.
Investments must perform. Investments must perform within a reasonable timeframe to the level desired by the investors.
The investor should look at his investments and partnerships regularly and if something is not working, change it/re-arrange it, sell it or buy them out and move on.
You have heard of the definition of insanity;
“doing the same thing over and over and expecting different results.”
Renew, refresh, rearrange, sell and recycle that capital into new, fresh ideas.
As you consider a real estate investment you realize that there are lots of uncertainties, risk of loss of capital, poor choice of location/over paid/ property needs lots more work + capital then planned, partners who are either unskilled or just not honest and therefore the low yield (low ROI) or even a total loss.
Maybe the investment needs a new inflow of capital to sustain it because the income doesn’t cover the expenses. Maybe you need a new partner with capital and better knowledge + skills.
These things could happen and it may be perfectly alright, however if there is a continual need of new capital and there is no real end in sight of making money and achieving a desired ROI.
It may be wiser to just get out and recycle your capital into a more worthy investment.
Why are you doing this you must ask?
Are there better more profitable alternatives?
The investment may be relatively sound, but the partners or arrangement
needs to be changed.
Everything should be on the table for a brief consideration and discussion
followed by ACTION.
Our money should be working for us as hard as we work for the money.
Have higher expectations for your capital.
What’s the short game?
What’s the long game?
And by game we mean strategy, your plan to succeed and achieve the
highest desirable results for your investments /properties.
Let us help you figure it out.
Envoy Capitol Realty Inc., Brokerage is a full service real estate brokerage with professionals that can assist you in your review of your property investment(s), discuss valuation, marketing your property for sale or help you local, assess and purchase an investment property in the GTA.
Envoy Capitol Realty Inc. Brokerage has experience in management and development. We can become your ex-officio real estate department for your FAMILY BUSINESS OFFICE and handle all your real estate needs end to end, with regular reporting/planning and action.
Email : [email protected]
Check out our books on Amazon and our articles on our Blogsites;
The Greatest Money Machine and Silver Bullet Investing
www.yeretsianonrealestateinvesting.wordpress.com or www.capitalmoves.blogspot.com