Mental Accounting of Entrepreneurs

I believe it takes a different mindset to be an entrepreneur. With it goes a different mental accounting. I am almost convinced that all those with a complete rational take on things, estimate likelihood of alternative scenarios and evaluate Net Present Value of all available options to choose the best possible course do not get into entrepreneurship. Here is one cost that will be immaterial in a rational decision making process but to an entrepreneur who is, “fired up and ready to go”, it is extremely relevant.

Sunk Costs: We have already come so far, we cannot give up now!

“I had invested my life savings and I knew there was no turning back,” says Mr. Conway in an interview with The Journal. To the rational decision maker it is clear that costs in the past are immaterial to decisions at hand. But it is exactly those past investments that keep entrepreneurs moving forward. In fact some take steps to sink enough costs to given them the justification to stay the course.

We need those brave souls who are unfazed by numerous failures and have the mental strength to “not let the past investments go to waste”.

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