Business Terms Everyone Should Know

26 June 2019

These are terms or ideas that, known or not, most people use in their every day decision making and are useful in larger project planning. It's good to know these terms as a developer because they help your interactions with project managers and executive leadership, plus improve your general decision making and planning.

Sunk Cost - Sunk cost is the idea that any costs already incurred should not affect the decisions of future expenses. It's the basis for the phrase "Throwing good money after bad." A common scenario is:

Your project is behind schedule and exceeded it's $1,000,000 budget. Leadership is looking for alternatives and you've come down to two solutions:
1. For $750,000 you can continue with your current work and codebase and deliver in X months. 2. For $650,000 you can throw it away, using lessons learned and maybe a tech change, and deliver in X months.

Many people will emotionally say "We already spent $1,000,000 on this so let's do Option 1 so that money hasn't gone to waste." But economically speaking, that is the wrong decision here. Option 2 is the better choice because it delivers in the same amount of time (X) but costs less. Ignoring sunk cost is a problem I've seen many people make, from MBAs to Nuclear Phsyicists. Emotions are hard to battle when making economic decisions.

Opportunity Cost - Opportunity cost is the cost of a associated with an opportunity not taken. It's most commonly represented by the phrase "Time is money." If you're a contract programmer paid by the hour and one day decide to take the day off and go golfing, then the opportunity cost of that decision is your lost wages. When you find yourself weighing the options for what you want to do with a Friday night, such as dinner date with your significant other, girls/boys night out, staying in and reading, etc, the cost of that decision is the value of the most significant option not taken (important to note that it is not the sum of all opportunities not taken, just the most valuable of the ones not taken).

Game Theory - Game Theory is a bit of a complicated topic and I'm not smart enough to fully explain it. While I've provided links to Wikipedia for all of the topics I'm discussing in this article, I particularly recommend you click this one if you are unfamiliar with it and want to read up on it. The gist of Game Theory is the use of mathematical models to study/predict the interactions of rational decision makers. It's used in international trade treatise, video games, propaganda and marketing decisions, etc. It's everywhere but most people don't know it.

The Iron Triangle - The Iron Triangle, or Project Management Triangle, or Triple Constraint, says that the Quality of a delivery is a constant compromise between Cost, Time, and Scope. Any increase or sacrifice to one will the affect the others and alter the quality of your delivery.