The most important decision-making rule you learn in business school is still largely misunderstood.
When making a choice between two options, only consider what’s going to happen in the future, not which investments you’ve made in the past. The past investments are over, lost, gone forever. They are irrelevant to the future.
You have two pieces of land. One you bought for $1,000,000, one for $10,000. On which one should you develop a gas station?
I know. The one that’s right next to the huge subdivision being put up, not the one next to the condemned shopping center. Does it matter how much the land cost to buy? No. Not at all.
You have tickets to the Springsteen concert. They were really hard to get. You spent four hours surfing StubHub until you found the perfect seats for $55 each.
On your way into the event, a guy offers you $500 cash for each ticket. Should you sell?
It turns out the amount of time you spent getting the tickets is irrelevant. If you wouldn’t be willing to PAY $500 for these tickets (and you weren’t, or you would have) then you should be willing to sell them for $500. Spend $250 on dinner and go buy better tickets for tomorrow night’s show.
Or say you make a mistake and go to the concert instead of selling (those seats are $500 seats now). But Bruce is sick and Manfred Mann is substituting for him. You don’t like him so much. But you paid $500 for the seats! Should you stay?
[Just because the guy spent a lot on the sign for his store doesn’t mean he shouldn’t spend more to spell the biggest word properly. The amount he already spent is irrelevant. What matters is what the benefit of spelling ‘stationery’ properly will be.]
Ignore sunk costs.