sinking decisions and sunk costs

The past few weeks have been a whirlwind of time and energy spent on setting up the new studio I purchased for Laura Novak Photography.  Contractors, flooring refinishers, painting quotes, ordering furniture (including some great finds on ebay!) have been a huge part of my day in addition to my normal daily responsibilities at Laura Novak Photography.

A few people have asked why I am moving again, when I spent so much time and effort on my current space.  Emotionally, I love 1905 Delaware Avenue (where I am now).  I put my heart and soul into the building and our location plays a large part in we grew so fast.  The amount of effort I put into my current space certainly made it challenging when faced with the decision as to whether or not I should buy a new building.  In order to make the decision, I had to take into consideration the principle of sunk costs.

Wikipedia states sunk costs as: costs that cannot be recovered once they have been incurred. Economics proposes that a rational actor does not let sunk costs influence one's decisions, because doing so would not be assessing a decision exclusively on its own merits. The decision-maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem and distinct from a sunk cost problem.

For example, when one pre-orders a non-refundable and non-transferable movie ticket, the price of the ticket becomes a sunk cost. Even if the ticket-buyer decides that he would rather not go to the movie, there is no way to get back the money he originally paid. Therefore, the sunk cost of the ticket should have no bearing on the decision of whether or not to actually go to the movie. In other words, it is a fallacy to conclude that he should go to the movie so as to avoid "wasting" the cost of the ticket.

Such is true in business.  How many times have you made a decision based on money or effort you have already spent?  It's important to try to separate emotion from these circumstances, as the costs are in the past and have nothing to do with decisions to be made in the future.  Such is the case with buying the new studio shortly after moving into one three years ago.  When I ran the numbers on buying the building and moving, versus staying in my current space and renting it made more sense to move based on long term benefits.  

So while I am sad to leave my current space that I spent so much time and money on, the theory of sunk costs tells me that those investments are sunk and they have no bearing decisions to be made on the future of Laura Novak Photography.  And because of what I believe about our vision and mission, buying a space provides us with the long term stability and room for growth I see in our future.

Comments

[Cameron Clark]

PHOTOS! PLEASE! Progress, etc.

[Natalie Sousa]

This is a really great perspective on jump starting your new studio - thanks for sharing!

As you clearly stated, its sooo easy to get
caught up in emotional issues of why you should or should not do something. But the truth is, you really need to work hard at controlling your emotions - so you can make clear, confident choices. Otherwise, those emotions will creep up in ways that will only make it difficult to build your business/brand. (Believe me I know! :-)

[Carl Reid]

Great post...I especially like the movie ticket analogy. I'll make sure to keep the concept of "sunk costs" in mind for my future business initiatives.

[Jenny Duffy]

Yes! Makes perfect sense! Why flush that cash down the toilet in renting when you can invest in something all your own that will grow $$$ :) Good Luck, Laura!

[tiffiney]

whoa! that post was so on time for me. thanks for helping me to focus long term!

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