One of the best things about being an economist is understanding sunk costs.
Sunk cost is the idea that you can’t change the past. What’s done is done. How much effort you put in or what you spent in the past shouldn’t matter in your decision making. All that matters is where you are now at this point in time and what the costs and benefits are in the future. Compare the future costs and benefits, not the future plus the past.
The canonical example given: It is raining and you had a hard day at work. You have tickets for a basketball game that you were looking forward to, but now you’re not so sure. Should your answer about whether to go or not depend on how much you paid for the tickets?
If you understand sunk costs, then the answer should be no. The costs of driving in the rain and not going to bed early should be weighed only against the pleasure you get from going to the event. Your answer should be no different if you paid $60 for the tickets or if your sister got them for you from her fancy corporate job (right before you were about to purchase them yourself). Most people don’t understand sunk costs, not even rationally. (In fact, some folks may want to argue with me in the comments– knock yourselves out!)
Even though I rationally understand sunk costs, sometimes I have to be reminded. It’s like when I went into labor with DC1 and my mom said, “Shouldn’t you be breathing or something?” Oh yeah, breathing. That made things a lot less painful.
Most recently… I’ve been working on a paper off and on for an embarrassingly long time. Finally someone else decided to scoop me on it. I need to get the damn thing out before they get published. Soon. When I found out I was a mess… I have spent WAY too much time on the paper, much of it going down blocked alleyways. And it was almost done two years ago and I put it down again. It could have been out two years ago and then I wouldn’t be being scooped.
DH says magic phrase, “sunk costs.”
Oh yeah. Sunk costs. All that matters is what I do now, which is less work because I just need to incorporate the things from my (cough 2009 cough) power point into the paper, smooth it up, and send it out. And hey, that’s less work on a paper that I’m frankly quite sick of than I would have to do if I wanted to get it into a better journal.
Truly understanding sunk costs can help a person stop being emotionally blocked, and enable a person to move forward. Have no regrets, take what you can learn, and move on.
Not that I’m not kicking myself in t-1 (also t-3, and t-7), but what can you do? Nothing. Just move forward.
October 22, 2012 at 5:15 am
Sometimes I intentionally ignore sunk costs because it gives me a kick in the butt to not be lazy. For example, last weekend, I had signed up for a 5k. I didn’t really train and was kind of dreading the 5k. But I went because I had paid for it, and I didn’t want the money to go to waste. While I didn’t do the best job, I did go and (mostly) enjoy running the race. Except for the tension headache afterward.
Sunk costs are important to remember. But I still think it is also important to recognize the emotional side of spending and money and weigh that too. Especially when I had little cash, I was loathe to not do something I had already paid for because it was a splurge to pay for anything.
October 22, 2012 at 11:56 am
I love these mind games we play with ourselves. One of the reasons we do a CSA is to force ourselves to eat healthily. There’s a good portion of “but I would feel guilty if this fresh produce went to waste” when trying to figure out what to do with the next zucchini. (Pickles, in case you’re interested. There’s only so much zucchini bread that fits in a freezer, and only so much a person can give away.)
We do, however, no longer pick up the turnip and mustard greens (they go to the food pantry the next day). Blech. It isn’t the “we paid for it” so much as the “someone else could have gotten use out of this.”
October 22, 2012 at 7:01 am
I recently put an article I’ve been working on for over a year in a drawer, because of the sunk cost. I realized I was putting too much into it and not getting anywhere, and I just needed to move on. It can be so hard to come that conclusion – the more you work on something (whether it’s work or relationships or what have you), the harder it can be, especially for stubborn types.
October 22, 2012 at 8:45 am
“…I just needed to move on. It can be so hard to come that conclusion – the more you work on something (whether it’s work or relationships or what have you), the harder it can be, especially for stubborn types.”
This is what I’ve been trying to figure out for myself. I happen to be a stubborn type. :P
October 24, 2012 at 10:58 am
There’s such a thing as giving up too soon and also such a thing as beating a dead horse. It’s hard to know which is which. I have learned that I tend to err in the direction of quitting too soon. I learned then when I quit job hunting and then read that it normally takes 10 – 15 interviews before people get an acceptable offer. I looked back at my records and saw that I had quit after 9 interviews. So I started up again and got an acceptable job offer on my 13th interview (I think it was). I also tend to give up too soon on trying to figure things out and on trying to learn things.
On the other hand, I tend to be too macho about deciding whether I am too sick or injured to do things.
Knowing these tendencies about myself helps me make the right choice–if I’m not sure, I assume I’m doing my usual error and go from there.
October 22, 2012 at 8:47 am
Good post. I’ve been trying to figure out if something is worth it and how to untie much of the “worth” from the past, (my past efforts, disappointments, etc), and this gives me a different way to look at the situation.
October 22, 2012 at 9:24 am
Nice post and explanation. I need to remember this!
October 22, 2012 at 10:51 am
I have tried to explain this to a friend. She had a shop were she took things on consignment and bought things to sell there. Three years ago she went out of business and moved it all to three storage units. She sells it piecemeal in another consignment shop. Her booth there is $80/month. She sold $35 last month. She reminds me of what all the stuff is worth when I suggest selling it for anything to get from under the storage units and booth costs. She is adamant that she is not giving away valuable furniture. I told her it really worth nothing because of ongoing costs. She cannot understand sunk costs.
Me? Stubborn about some things. But, I do realize sunk costs. However, I am investing no money, just emotions in my things.
October 22, 2012 at 11:27 am
The concept of sunk costs is important in decision making because the idea is to correctly evaluate the different utilities for each option. I think that a tricky point is that if it would cause you future unhappiness to remember that you “wasted” the money buying the tickets, then that disutility should be considered in your evaluation. Perhaps this point explains why many decisions in bureaucratic organizations don’t appear to consider sunk costs…because each decision-maker is going to have to explain at some later date to his/her boss why the right decision was to cut losses, all the way up the chain. Less pain just to continue a project that should be cut and when it fails blame the failure on something/someone else.
Or maybe that’s too pessimistic and really it’s just that people aren’t rational.
October 22, 2012 at 11:57 am
There’s an area of behavioral economic called “regret theory” that kind of goes into this.
October 22, 2012 at 11:34 am
This is so timely as I am currently debating whether to finish up my dissertation. As I am miserable writing the dissertation, do not need the completed dissertation for my current job, and see no long-term benefit to the completion, I want to stop and cut my losses. Everyone else keeps telling me that I have put so much time and effort in my PhD program and, therefore, I should finish the dissertation. Apparently, everyone in my life is having a hard time with the emotional aspect of this, except me.
“Have no regrets, take what you can learn, and move on.” This is my new manta.
October 22, 2012 at 11:38 am
yup, you should be comparing the costs to completion (how much do you really need to get done) to the benefits (will it help you later on)
It may or may not be worth it depending on what’s on those two sides of the equation. If we’re talking one week of work and a step pay raise, then sure. If we’re talking two more years out of your life for no purpose, then why bother? Obviously only you can figure out and weigh the pros and cons.
October 22, 2012 at 12:54 pm
My situation is more of the latter – 1.5-2 years to complete with a minuscule (if any) pay raise. As far as I can tell, the only benefit would be having the PhD after my name (which apparently is incredibly important to some people) and honestly that means nothing to me.
October 22, 2012 at 1:03 pm
Having the Phd after your name is (mentally/emotionally) really awesome for about a year (that’s when you delight in putting “Dr.” on your drivers license or frequent flyer miles). Then even deep down you realize it’s just another job credential. It just doesn’t last.
So in general, No vale la pena unless you’re going to use it or you’re getting enjoyment out of the program itself etc. 1.5-2 years for something you don’t want to do in exchange for little to no money sounds like a waste of time to me!
October 24, 2012 at 2:19 pm
I abandoned my first master’s thesis topic after I realized that the resources required did not reside in the United States. As a broke grad student, traveling to England to consult the primary sources was not an option.
I later picked up and completed a second thesis topic. But it was pure bloody-mindedness that drove me. The degree didn’t amount to a dime in terms of my career path.
I say if you don’t need it, don’t do it, and revel in your freedom. :-)
October 22, 2012 at 11:39 am
The biggest sunk cost problem I messed up was a romantic relationship — I use the adjective *very* loosely — where I had put so much effort into it that I was bound and determined I was going to stick with it until he gave something back (er, lest that sound gold-diggery, by “something” I mean time, effort, consideration).
Know what? That doesn’t work. He did in the end give me something tremendously valuable, though: he broke up with me. Precise timing is a tad hazy, but I date it to Independence Day as that is one (of several) plausible dates, and has a nice ring to it, even lo these many years later. What the heck was I thinking?
October 22, 2012 at 11:49 am
Seriously! Been there, done that. Much happier as a boring approaching middle-age person. What were we thinking?
October 22, 2012 at 5:14 pm
Unfortunately, I have been in the relationship sunk cost dilemma. After trying to get “something” back, I realized that I just lost more.
October 25, 2012 at 10:57 pm
Therapy peeps call it The Overcommit. Yep, I’ve BTDT, too.
October 22, 2012 at 12:26 pm
So, would being denied tenure be considered a “sunk cost”?
October 22, 2012 at 12:27 pm
After it happens, yes. Unless there’s a way to reverse the decision, in which case the (expected) costs and benefits to trying to get it reversed come into play.
October 22, 2012 at 1:30 pm
sunk costs = most useful lesson of first marriage
October 23, 2012 at 2:27 pm
Great post! A very important concept to know, understand, remember AND follow. Not only in terms of man hours and productivity but also in terms of relationships, and mental ‘bandwidth’. I’m certainly one that needs reminding on this, so, Thank you :)
October 24, 2012 at 11:02 am
Knowing about sunk costs is especially handy for stuff like decluttering and cleaning out the fridge. You do need to pay attention to those costs, but only for training yourself to not sink so many bad costs in the future.
October 24, 2012 at 11:14 am
October 24, 2012 at 2:22 pm
Indeed. One should throw out the specific un-used vegetable no more than twice before determining it should never again enter the house.
And one should donate the uncomfortable shoes after the second unhappy wearing, without regard to their cost. I give them two only because I’m a girl and Ma Nature plays havoc with my dimensions at times.
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