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by raylu
4776 days ago
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I think you misunderstand sunk cost. Sunk cost basically just says to always employ a purely-forward-looking strategy when evaluating costs and benefits. > vs how much some other endeavour will take to become profitable AND how much it will cost to switch. Wait, what are these two costs? Aren't they the same? Where did the cost of switching come from? |
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I don't think I misunderstand sunk cost, but perhaps I didn't explain my point well enough.
I agree that you need to be forward looking, but whilst looking forward it can be important to consider existing investment. Existing investment is not ALWAYS worth nothing, so its value needs to be accounted for. Existing investment is also a metric that, whilst lending itself to entwining one in the Sunk Cost Fallacy, is an important part of answering the question "how much more investment is needed?"
The sunk cost fallacy applies in a situation where previous investment has been lost. The typical example is in gambling, where each spin of the wheel is independent of how much you have already lost on the table. When in a startup, however, previous investment is not necessarily lost, so switching to a new one is (typically) not the same as continuing one you have already invested in.
>> vs how much some other endeavour will take to become profitable AND how much it will cost to switch.
> Wait, what are these two costs? Aren't they the same? Where did the cost of switching come from?
The cost of switching is a way of characterising things like lost earnings and payouts that are not directly related to starting a new endeavour. They are typically, though not always, constant regardless of the new endeavour being considered, and so it makes sense to keep them separate.
Examples of switching costs:
* paying out a phone contract;
* loss of long service benefits (if someone is close to receiving long service benefits they will typically wait to receive them before switching jobs);
* non-compete clauses.