From the Archives: Avoiding the Sunk Cost Fallacy

From time to time, we share previous content that has enduring significance for nonprofit organizations. The following blog post was originally published on 12/4/15 and has been lightly refreshed.


Nonprofits face a unique set of financial challenges. The work that a nonprofit performs is vital to the community it serves, but measuring a return on investment can be hard to do. In addition, future funding streams are often uncertain – contributions can fluctuate due to changes in the economy or donor participation. When resources are scarce, many people have a tendency to avoid investing in new processes or equipment, reasoning that continued use of an old or outdated system (which has already been developed and/or paid for) is preferable to trying something new. However, this attitude can squander one of your most valuable resources - time.

The “sunk cost fallacy” refers to our human tendency to continue on a path once we have invested time, effort or resources into an initial start-up process. We often don’t even realize that we are using our resources inefficiently - we think we are simply continuing with business as usual. Add that to the tendency to prioritize urgent matters while less urgent (but equally important) tasks aside, and you have the potential for some serious inefficiency.

One way you can avoid the sunk cost fallacy is to pay close attention to how you are spending your time. By encouraging your employees or volunteers to keep track of their time on a daily basis, you can gain valuable insights into the functioning of your organization, and the efficiency of your systems. Bottlenecks become apparent, and time spent on low-impact activities can be quantified.

Every organization has to determine for themselves what the optimal timekeeping system looks like, and how often to review the resulting information. We recommend looking at how your expenses are tracked between programs, general administration, and fundraising, and track time the same way. Regualry review the time that's been spent on existing processes and new programs. This approach helps you identify the impact of new programs and technology, and makes any inefficiencies stand out more clearly. After gathering this data, don’t be afraid to ask for a change to create better results.This will help your organization avoid the sunk cost fallacy and ensure your time is spent wisely.