{"id":835,"date":"2008-09-15T17:29:10","date_gmt":"2008-09-16T00:29:10","guid":{"rendered":"https:\/\/www.scotthyoung.com\/blog\/2008\/09\/15\/dont-forget-sunk-costs-stupid\/"},"modified":"2018-04-04T03:00:25","modified_gmt":"2018-04-04T10:00:25","slug":"dont-forget-sunk-costs-stupid","status":"publish","type":"post","link":"https:\/\/www.scotthyoung.com\/blog\/2008\/09\/15\/dont-forget-sunk-costs-stupid\/","title":{"rendered":"Don&#8217;t Forget Sunk Costs, Stupid!"},"content":{"rendered":"<p><a href=\"http:\/\/flickr.com\/photos\/coljay72\/2399545998\/\"><img decoding=\"async\" src=\"https:\/\/www.scotthyoung.com\/blog\/wp-content\/uploads\/2008\/09\/sunkinhole.png\" alt=\"SunkInHole.png\" \/><\/a><\/p>\n<p>People are normally fairly intelligent.\u00c2\u00a0 Although there are many exceptions, people tend to make rational decisions.\u00c2\u00a0 However, there are some decisions that most people get wrong (including me).\u00c2\u00a0 There is a whole field of psychology devoted to these non-random acts of stupidity, known as cognitive biases.\u00c2\u00a0 I\u2019ve always found cognitive biases interesting, since understanding them is the first step to avoiding making bad decisions.<\/p>\n<p>An extremely common bias is forgetting about sunk costs.\u00c2\u00a0 Skipping a more formal definition, a sunk cost is a term from economics to describe money (or time, energy, etc.) that has already been spent in a past decision.\u00c2\u00a0 Since the money is gone, it shouldn\u2019t be a factor in making new decisions.<\/p>\n<h2>Why I\u2019m Fun at Parties<\/h2>\n<p>Giving slightly inebriated lectures about rational decision making at a party is part of my charm.\u00c2\u00a0 I\u2019m sure my friends that I explained sunk costs to at a show last Saturday also felt the same way.\u00c2\u00a0 It makes a good example of how it\u2019s easy to get tricked into sunk costs, so despite the setting I\u2019ll use it:<\/p>\n<p>My friends and I had spent $12 to go to a show.\u00c2\u00a0 We decided we didn\u2019t like the music, but there was another party (and DJ) that we would enjoy more, less than 2 minutes away, for $7.\u00c2\u00a0 Some of my friends argued that we should stay here, because we paid $12, so we might as well enjoy the band.<\/p>\n<p>At this point I enlightened them about sunk costs.\u00c2\u00a0 Since we had already spent $12, that money was gone, and shouldn\u2019t be part of a decision to stay or leave.\u00c2\u00a0 A better way to phrase the decision was to pick between staying at this show for free or going to the other party for $7.\u00c2\u00a0 The original ticket price didn\u2019t matter if the transfer to the other party was worth $7 to us.<\/p>\n<p>I was only half-joking when I brought up sunk costs, because I feel it\u2019s a trap many people get caught in with everyday decisions.\u00c2\u00a0 Although debating between parties on a Saturday night isn\u2019t too important, it can be incredibly important when making life decisions like what career to pursue, what projects to finish and what degrees to achieve.<\/p>\n<h2>Should You Quit the Project?<\/h2>\n<p>In simple economic rationality, you should stop any project where the payoff is less than the amount you need to invest to reach that payoff.\u00c2\u00a0 So it\u2019s stupid to spend $10,000 on a project only destined to pay out $6000 (assuming money is your only measure of value in this example).<\/p>\n<p>Where this gets confusing is when you introduce a sunk cost.\u00c2\u00a0 It\u2019s easy to chase a $3000 payoff when you still need $4000 in investment, if you\u2019ve spent months and years working towards it already.\u00c2\u00a0 I\u2019m sure we all know personal examples where we stick with doomed projects out of the misguided desire to finish what we start.<\/p>\n<p>Avoiding sunk costs means you need to remove any past investment from your mind before you make a decision.\u00c2\u00a0 In my personal example, this meant forgetting I previously made the (bad) decision to spend $12 on one party, when deciding to stay or switch.\u00c2\u00a0 For a project, this means forgetting the time you\u2019ve already spent and focus on what you still need to spend.<\/p>\n<p>I think the sunk cost fallacy is similar to another human bias of valuing the things we have more than the things we don\u2019t.\u00c2\u00a0 When you spend months working on a project, you feel ownership of it.\u00c2\u00a0 As a result, we make irrational decisions to stick with it, because it\u2019s <em>our<\/em> project.<\/p>\n<h2>Staying with the Degree or Career<\/h2>\n<p>A lot of University students need to face a sunk cost problem.\u00c2\u00a0 Midway through a degree program, they decide they don\u2019t want a job in their chosen field.\u00c2\u00a0 Should they finish the degree anyways or switch?<\/p>\n<p>This is a complicated decision with many factors, so no simple trick can automatically decide the right answer.\u00c2\u00a0 However, if you view this problem through the sunk cost lens, you\u2019ll realize that the time already put forwards towards the degree isn\u2019t important.\u00c2\u00a0 Whether that time was invested or wasted, it can\u2019t be changed, so you need to focus on the future.<\/p>\n<p>If you were midway through a 4-year Science degree and wanted to switch to Arts, your comparison should be between the 2 years you have left in Science and the 4 years needed for Arts.\u00c2\u00a0 Once again, it is easy to bring back the past years and use them as a starting point to justify wasting more time in a failed path.<\/p>\n<p>The same idea could apply with a career.\u00c2\u00a0 Your past experience isn\u2019t a factor in staying or switching.\u00c2\u00a0 Instead you should pretend you were deciding today, would you pick your old job, benefits and salary or would you pick a different job, with it\u2019s starting pay and benefits.<\/p>\n<h2>How to Remember Sunk Costs<\/h2>\n<p>I\u2019m just like everyone else in forgetting about sunk costs.\u00c2\u00a0 I have irrational attachments to pursuits and projects.\u00c2\u00a0 I\u2019m as biased as everyone else.\u00c2\u00a0 But I think being aware that you\u2019re likely to make stupid errors means you\u2019re more likely to catch them before they become life-changing decisions.<\/p>\n<p>I believe the best way to remember sunk costs is to pretend you were starting with a fresh decision.\u00c2\u00a0 Eliminate the past and pretend you were starting over.\u00c2\u00a0 Compare the leftover of one pursuit with beginning the alternatives.\u00c2\u00a0 Last Saturday, this meant comparing a free social where the music was mediocre with a good party which cost $7.<\/p>\n<p>Obviously, sunk costs are just one tool for rational thinking.\u00c2\u00a0 They don\u2019t automatically make the right decision.\u00c2\u00a0 For example, I stayed at the $12 social because my friends decided to stay.\u00c2\u00a0 Switching to a party by myself wasn\u2019t worth $7.\u00c2\u00a0 You might also stay with projects for the psychological satisfaction of completion (which is a hard value to quantify) or you may stay in a path for reasons that can\u2019t be measured.\u00c2\u00a0 But at least being aware of sunk costs gives you a bit more control.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>People are normally fairly intelligent.\u00c2\u00a0 Although there are many exceptions, people tend to make rational decisions.\u00c2\u00a0 However, there are some decisions that most people get wrong (including me).\u00c2\u00a0 There is a whole field of psychology devoted to these non-random acts of stupidity, known as cognitive biases.\u00c2\u00a0 I\u2019ve always found cognitive biases interesting, since understanding them [&hellip;]<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[681,658],"tags":[195,196,194,193,50],"class_list":{"0":"post-835","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-nc-mindset","7":"category-rationality","8":"tag-decision-making","9":"tag-economics","10":"tag-rationality","11":"tag-sunk-cost","12":"tag-thinking","13":"entry"},"acf":[],"yoast_head":"<!-- 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