by Leon Rosenshein

Kinds of Costs


Costs are costs, right? You pays your money and you takes your choice. Simple, right? Not really. There are all kinds of costs. Up front, back end, hidden, and delayed for example. All of those are relevant to development. Besides those, there are two major ones to be aware of because they often turn into biases

  • Opportunity Cost: The time & money you spend on X means you can’t do Y. So choose wisely.
  • Sunk Cost: The time money already spent on X is gone. Is Y cheaper than continuing X?

Opportunity cost bias often gets expressed as one of 2 ways. The first is fear of making the wrong choice. Instead of thinking about what you should do and devoting enough resources on X to actually get it done, choose not to decide and peanut butter the resources around. You spread them thinly over multiple choices, and instead of finishing something you end up not finishing anything. Just like you want to [minimize work in progress] /posts/2021/09/09/). You have the time to get things done. You want to focus your resources.

The second is assuming facts not in evidence. Things like assuming you know exactly what the result of the different choices would be. That choice X will have a 100% return, while choice Y will have a 1000% return. It might happen, but what are the odds of each. You can’t use the potential upside without considering the probabilities. Not just ROI, but things like time, or how others will perceive it. You might assume X will take 2 days and Y 2 weeks, but that doesn’t mean it will happen. You might like bright colors and choose to paint a salmon-pink accent wall in your kitchen, but that doesn’t mean your prospective buyers will like it. There’s a reason why your real estate agent stages your house without doing anything unusual.

Sunk cost bias also come from fear. Fear that you’ve wasted your time/money/resources. No one wants to waste things, so you get that feeling you have that you’re almost done. That solving one more little problem will make everything work. After all, you’ve already invested (sunk) a bunch of resources into it. A little more to make it work makes sense. And if it’s a little more then you’re right. But if you let the fear (or pride of ownership) take control then you underestimate the cost of continuing and overestimate the cost of trying something new. Otherwise known as throwing good money after bad.

The thing is, both costs are real. You need to take them into account. The trick is to make a good decision. One based on facts, not biases.