Sunk Costs

One of the most difficult things to avoid in the current environment is sending good money after bad, or to put it another way, being able to walk away from sunk costs.  Sometimes it’s difficult to realize when the market has robbed you of any equity you had in a deal.  You still want to believe that the investment can be the home run you envisioned when you got into it.

The Cincinnati Bengals, hardly a shining example of organizational excellence, recently displayed an almost ruthless recognition of a sunk cost and were able to walk away from it.  They signed wide receiver Antonio Bryant to a large free agent contract including $8 million in guaranteed money.  It was probably a questionable move at that time because Bryant was coming off of knee surgery.  In order to cover themselves they also signed wide receiver Terrell Owens, who has played well in the preseason.  Bryant’s knee has indeed become an issue, he hasn’t played in any of the preseason games because of it, and the Bengals have actually done a reasonably sensible thing.  They cut Bryant.

A lot of the sports talk radio has focused on the general theme of “You can’t cut him, you just paid him a lot of money.”  But the Bengals (against all odds it should be said) actually did what is probably the correct thing from an economic standpoint.  The $8 million guaranteed is gone.  They can’t get it back.  Thinking about the $8 million when they make future decisions isn’t going to help them on a going forward basis.  They feel like Bryant isn’t going to be worth the remaining portion of his contract and they’re going to try to better spend the money that they were going to pay him.

Human behavior suggests that what the Bengals did, essentially admit to your mistake early and cut your losses, is the more difficult of the actions available.  It would have been easier to keep paying Bryant and hope that he makes it back from his knee injury.  Doing that means deferring to the future the day when it will become apparent that the $8 million guaranteed becomes obvious as a huge mistake.

But then, if you’re the Bengals maybe you have an inherent advantage.  Maybe the fact that everyone expects you to make a mistake allows you to more readily admit the mistake.