Sunk Costs And Legacy Infrastructure (Gwen Moritz Editor's Note)

by Gwen Moritz  on Monday, Oct. 1, 2012 12:00 am  

The fresh-faced coed who struggled mightily with her one required economics class would undoubtedly be astonished to find that, 30 years later, she spends a considerable amount of time pondering sunk costs and legacy infrastructure.

At some point along the way, I heard that one should never consider sunk costs - that is, past expenditures that can't be recouped - when deciding how to invest in the future. I think about that when I ponder a particular piece of furniture that cost quite a lot but doesn't function as well as I had hoped. I think about it when I advise my young friends to invest in mid-century modern furniture, which is cheap and plentiful and stylish, but I don't buy it myself because my house is already full of traditional style furniture. I think about it when the mechanic tells me that my 14-year-old boat isn't worth fixing and then tries to sell me a new one at 20 times the cost of the repair.

It may make theoretical sense to ignore past expenses, but theory and practice are two different things. The boat is worth more to me than it is to the mechanic, that's for sure, and it's worthless if it doesn't run. The car that your insurance company wants to total is worth more to you than the blue-book value.

Closely related to sunk costs, in my mind anyway, is the idea of legacy infrastructure. I keep buying traditional style furniture because that's what I've always invested in. And I do like traditional styles, but I also know that my decorating path was set by the relative who gave me those first pieces of traditional furniture for my first apartment.

Those hand-me-downs are long gone, but the legacy lives on - and we're doing the same in so many areas of our personal lives and our society. The new Broadway Bridge is going to be in the same place as the old Broadway Bridge. China is connecting its new urban sprawl with high-speed rail that we can't afford because we have so much legacy pavement to maintain.

Are telephone lines and TV cables the best way to deliver broadband Internet service? I don't know, but I know we've already spent a lot of money to put that infrastructure into almost every home in America. Every time we have an ice storm, I wish we'd spent the money to bury our utility lines. Instead, we keep repairing them up on the tops of poles.

In parts of Africa, cellphone minutes have been used as currency for years now, while we're still swiping embossed plastic cards and taking about how cellphones will someday make cash and cards obsolete.

Inefficient legacy infrastructure is all around us. Several counties in Arkansas still have two county seats, for Pete's sake. And as painful as school consolidation has been and continues to be, we all know that we'd never dream of carving out so many school districts if we were starting over from scratch.

Our health care system is legacy. Even the earth-shaking "reform" has been built on the completely artificial connection between workplace and health insurance inspired by World War II wage controls. We just can't seem to let it go.

So the fourth quarter of 2012 has arrived, and every business on earth is planning for next year and beyond. How will you treat your sunk costs and legacy infrastructures in 2013? That investment you made last year or the year before - is it paying off or is it time to cut your losses? (Last week's Exec Q&A feature with Burt Hanna, founder and CEO of Hanna's Candles Co. of Fayetteville, was one of my all-time favorites. In it he confessed frankly to multiple costly missteps in his business during the past 25 years.) Are you hesitant to change something that you've been doing because of the sunk costs you already have invested in the current method? Do you keep patching together things that really should be replaced? See how this can start to occupy your mind?

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I might have done better in that college economics class if the professor, rather than jangling keys in his pocket with one hand while rubbing the other hand across his mouth as he mumbled, had explained fundamental economic theories the way my mother did: "There's no use crying over spilt milk," "waste not, want not," "don't put all your eggs in one basket," "don't throw good money after bad," "a stitch in time saves nine."

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com and follow her on Twitter @GwenMoritz.

 

 

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