In his book, Thinking fast and slow, Daniel Kahneman explained the concept of Sunken Costs to me. I found this concept powerful and interesting. But only recently I discovered the many costs that can be sunken. Here’s a brief summary for costs involved in software development.

Money

Sure, when we think about costs, the first thing our culture has started thinking about is money. Money appears to be the dominating way to pay something off. It has become so valuable to us that we see it as a primary driver for cost exchanges.

In software development, calculating how much money you invested is easy. Take the amount of time that people are working on stuff, multiply it with the amount of people involved, and their salary. Voila, you’re done. This calculation is quite easy with agile methodologies that favor a team that is working 100% on stuff.

The amount of money you have put into something influences how you think about it. If there is a project that you have been working on the past four years, you are looking for finishing it off – no matter how. On the other hand, if you are working on something for the second hour, chances are you easily switch to something more fruitful than the 1,000,000th accounting system.

Since money is a so dominating currency when it comes to sunken costs, people will make dysfunctional decision based upon it. For example, Cem Kaner mentions the company where programmers were given higher extra pay if they fixed more bugs. Testers were given higher extra pay if they found more bugs. Virtually there was no software developed anymore – even though that might lead to the company going out of business – and therefore the pay check donator for the employees.

Risks

Risks are harder to see sinking in. I think I did a misnomer with risks here, since I wanted to address the mitigation of risks rather than risks themselves. But risks seem to be catchier.

Risks come in a variety. There is technical risks that folks seem to address these days by building spike solutions. There is business which is largely influenced by costs in money, but also by the amount of revenue you get out of it. Then there is social risks. That risks usually comes in several notions on its own. Since people are individuals by themselves, they have pretty different understanding, needs, and challenges to tackle with. Social risks are all part of this.

When it comes to risks and sunken costs, remember that you are mitigating risks while working on stuff. You are delivering a spike solution to address the technical risk. You are addressing the business risks by getting feedback from real customers, and interviewing them for their needs. And you are installing a ScrumMaster or coach to tackle the social risks.

What Kahneman taught me has to do with your decisions based on the experiences level of sunken costs. When you feel that you have already invested 6 months of time into this Agile transition you surely want to see it succeed. When you have already worked with a ScrumMaster for 2 years, you are unlikely to fire that guy if he is effective. If your platform is running on JBoss 7 for 2 years, you are unlikely to move towards WebSphere.

Sunken costs applied to risks leads to different solutions – just like sunken costs in real money. Eventually you can calculate everything down to some money equivalent for the sunken costs, but probably you don’t need to.

And this is where I got the insight that maybe sunken costs are not only about money, but also about less tangible factors. Risks and the mitigation of risks are one of these. But there is a more dominant factor.

Social investments

Social investments happen when you educate your staff. Social investments happens when you hire a new team member. Social costs are less tangible than money costs – unless you only take into account the additional salary. There is a whole lot of stuff going on between team members that eventually should lead to team building effects.

Social costs are less dominating in our minds, but they are real. Consider the up-rising movement of development coaches that help you to shift some of your social investments in another direction. They try to use the social costs that you already invested by team-building towards working together more effectively. Coaches help you reach other levels of insights, and starting the whole team formation again.

Social costs sink in when you introduce a commercial tool, educate everyone, and find out that an open-source alternative would be more effective. That social cost will keep you from moving towards the better alternative, even though it will deliver better results.

But, it’s even worse. Your mind will trick into believing that whatever choice you made was well spent. It will convince you that method X will not work here – since you invested so much into Y. It will convince you that there are so many way method G won’t work here because you trained all the folks in method H.

Sunken costs vs. costs in Euros

Ever since I had that realization I became wary of sunken social costs. These are harder to work with as they may boil down to

• certifying everyone in your company for certificate X, and then you find out that certificate Y would be better for your working model
• managers made some mistakes when deciding for application A where application B would have been better
• personal careers attached to career path I, then the company needs to shift to a careerless model.

Now, here comes the hardest part about this lesson: While you can give numbers to all the monetary investments, it’s hard to measure the social investments in the terms above. The bottom line is this: People will know soon enough that they invested money wrongly, while the social investment might have been right. Nevertheless, people move away from the monetary goal, even though it might contradict the social investment being made.

That is why us consultants should do proper contract negotiation before starting a new client opportunity. The social investment will be high, you know that. The monetary one for your salary will be lower, but the two combined together will still outweigh the introduction of a commercial tool.

Keep that in mind.