Jitasa Nonprofit Blog

Nonprofits and the Myth of the Sunk Cost Fallacy

If you’ve spent a lot of time or money to make something work, you’re probably not going to give up easily, even if you should. It can be easy, in your personal life or your nonprofit organization, to fall into this trap--I’ve already spent x amount of time of x amount of dollars, so what’s a few more? It can seem that giving up means saying goodbye to any investment you’ve already made, which isn’t altogether untrue.

Nonprofits And The Myth of The Sunk Cost Fallacy

But sticking out a solution that isn’t going anywhere can also be problematic, and ultimately, more expensive. It’s called the “sunk cost fallacy”, and a lot of folks experience it, both personally and professionally.

In simple terms

The sunk cost fallacy occurs when we can’t let go of the idea that we’ve used our resources on something--no matter how inefficient and ineffective that pursuit might be. This idea that we’ve got to see to the end everything we begin can be dangerous, especially when we’re dealing with nonprofits with limited resources. Sometimes, giving up is the decision that makes the most sense in an organization, even if you have to say goodbye to some already spent time and money.

How to avoid falling into the trap

While we’re often quick to notice when we’ve sunk money into something, we can be less cognizant of time. For a nonprofit organization, this can mean simple time tracking applications, designed not to police employee time, but to give an accurate idea of where time is going. By looking at the amount of time dedicated to particular projects across an organization, you can better gauge the effectiveness of your hours, technology, and equipment.

For many nonprofits, money is inefficiently spent because reporting sometimes looks at a very small picture, by department or project. To get a better idea of how you’re using money, monitor your finances via a nonprofit accountant or internal structures that evaluate the big financial picture.

Finally, the biggest key to overcoming the sunk cost fallacy is to recognize that it can be an emotional journey too--you’ve sunk time and money into something, but also something more complicated. You’re focusing on what you’ll lose, and not what, by giving something up, you stand to gain.

The bottom line

Little children don’t care how much energy they’ve put into something--if it isn’t working out, they simply move on to the next thing. They’re interested in what can be immediately lost or gained, which can teach us something when things show no promise of working out.

This isn’t permission to throw in the towel if perseverance will pay off--instead, think of it as the push you need to give up on the thing that just isn’t going to work out. Say goodbye, move on, and learn from your mistakes. In this way, your time and money serve some small purpose.

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