Sunday, April 10, 2011

Sunk Costs - And Throwing Good Money After Bad

I spent over six months negotiating with my neighbors to get their support to build a roof deck. In addition to the time, the process was also costly thanks to legal and design fees. Fortunately we reached an agreement. Unfortunately, the revised cost estimate for actually building the roof came in at twice the cost of the initial estimate. It is so high that I am debating whether to proceed. Now, after devoting so much time, energy and money to reaching an agreement with my neighbors it is tempting to proceed with the project regardless of the cost. Otherwise, all my efforts would have been for nothing. However, what I've already done is a "sunk cost". There is no point in thinking too much about it. I must focus on the future and decide whether the additional cost of the project justifies it. It is a tough call... And, ideally, I should have gotten a more accurate estimate beforehand. Unfortunately we first needed to agree on the design compromise in order to get a proper estimate.

We also spoke about throwing "good money after bad". Suppose you buy a fancy espresso machine and it breaks down. Turned out it was an unreliable machine. You might be better off throwing it away and buying a new more reliable machine than spending a lot of money fixing the old one. Or, suppose you invest in a start-up and it turns out the entrepreneurs wasted your money. It might be tempting to give them more money so that the start-up stays in business and you don't "lose" your original investment, but if the entrepreneurs are no good, it would be better to "cut your loses".

Friday, April 1, 2011

We are moving to Cabarete!

I dropped the bomb on P & N this morning that after the summer we are moving to Cabarete for one year. They took it better than I expected. N's main frustration was having to go to school in Spanish. P was worried about having a proper piano to play on. And then they were very sad about the fact that we are going to sell our SF house and look for a new place when we come back. N said he would really miss our view...

Happy April's Fool Day!