If you’ve ever justified finishing a bad meal because you already paid for it, you encountered sunk cost thinking. If you’ve ever watched an entire movie after you lost interest in the first twenty minutes, you chose sunk costs over smart decision-making. The premise of sunk costs is pervasive throughout our lives. While the principle is financial in nature, money is not the only type of “cost” in sunk cost thinking. Anyone or any business that continues with a course of action based solely upon the time, money, energy or human capital already invested (instead of considering the best course of action) has fallen prey to the common decision trap of sunk costs.
Let’s use a classic ‘90s movie to explain the premise. In Groundhog Day, Bill Murray, a.k.a. Phil, is subjected to reliving the same 24 hours over and over again. While at first blush this may seem to have zero to do with sunk costs, hear me out. Phil wakes up each day with full awareness of what transpired the day before, but his friends do not. He has the choice to continue investing his time and energy in an attempt to win the heart of Rita, or he could choose to ignore the days and days of sunk costs and pursue other options. If Phil acknowledges and accepts his repetitive predicament, he would be free. Each day would be a new 24-hour window to test out a new set of ideas and options regardless of what transpired or failed the day prior. He could live life anew each morning.
While I hope that you do not wake up in a state of repetition that involves a furry rodent, our lives aren’t much different. Every morning we have the option to build our decision-making off of an existing structure of sunk costs, or we can choose to purse the best course of action to reach our future goals (regardless of what may be lost). Here are a few examples to help personalize the notion of sunk costs.
INVESTING OUR TIME
If you wake up every morning and slug through traffic to a job you loathe, you may be operating under the premise of sunk costs. “But I’ve been here for 7 years. If I stick it out, I may get that promotion. What will people think? I’ve already given so much of my life to learning this craft.” While all of these inner monologue excuses are valid reasons to stay right where you are and not reassess your career choice, these excuses are also the sunk cost fallacy at work. Because you’ve invested your time into a specific path, business or venture, you assume that staying the path is the best or only option.
Consider reframing your situation though. Instead of viewing the time spent as a lost asset, see the next 5 years as time saved if you were to pursue a path that mattered to you. Look at John Grisham. He ignored the sunk costs of time spent in law school and courtrooms to pursue his passion of writing. His decision turned out to be a great one due in large part to his past experience in law. Sunk costs of time do not have to be a lose-lose situation. Many things can be learned and garnered from the sunk costs of time, but it’s the choice to move forward in many cases that enables us to make them exponentially more valuable.
INVESTING OUR MONEY
You love soccer. You’ve watched every game of the season, and it’s finally time for the World Cup. You’ve purchased a ticket to the final match, because you‘re confident that your team will be in contention for the title. In the second game, the star player is injured and out for the duration of the tournament. The team never recovers and doesn’t make it to the finals. You’ve spent $500 on tickets, but you have no desire to go watch your arch rival progress to win the championship.
Do you go anyway? You could attempt to resell the tickets and get your money back. But if you decide to go because you spent the money, you just compounded sunk cost thinking with wasted time. Sitting in a stadium for three hours watching a team you don’t like will not bring your $500 back, but it will take away three hours of your life you could’ve devoted to something happier or more productive.
Often times we get sidetracked by the financial aspect of “getting our money’s worth,” while in actuality the money was exchanged for an experience. If it’s not the experience you paid for, why would you go? Don’t feel bad though, a study conducted by UC Berkeley shows significant sunk-cost effects on NBA players’ career tenure and playing time.
Many times sunk costs are hard to ignore, because they’re tied to our emotions or self-worth. Consider you’re a coach at a top tier university, and you’re training a player who has the potential to be an elite athlete and team leader. You’ve taught him speed, agility, strategy, tactics, fitness, nutrition – any and everything that it would take for him to succeed at this level of competition. He’s given his all and left nothing but sweat on the field.
One evening he makes a series of poor choices that land him in jail making him ineligible for collegiate play. Your investment in him is now deemed worthless. He’ll never step foot onto the football field, much less be the team leader and elite star that you had prepared him to be. The pride, excitement and the possibilities of the future are all dashed in one evening.
You’ll never recover the months of sweat equity you invested. However, you haven’t lost your ability to coach or to lead a player to the next level. The less time you spend lamenting the loss, the more time you can dedicate to a new player.
CHOOSING TO THINK FORWARD
Whether it’s money, time or the investment of our energy, sunk costs are a real factor in decisions that we make everyday. If we can learn to reframe our decision-making process to forget things that are lost and look forward to what can be accomplished, we will be better for it. So next time you’re considering whether to sit through the bad movie, finish the oversized burger or make that career leap, don’t think of it in terms of what you’ve already invested. Instead, I suggest that you think forward. Regardless of what has been forfeited to this point, thinking forward provides a new framework for progress instead of compromising due to sunk costs.
While sunk costs may have a negative connotation at first glance, I now see that there’s more to be gained that shedding dead weight and moving forward. Choosing to stop one course of action and move in a new direction does not mean that you cannot carry the best parts of that previous experience with you.
A tool to train ourselves to continually think forward is having the discipline to reframe our reality in light of future goals, while using knowledge gained from our sunk cost experiences. Let’s revisit the example of the coach and the ineligible player.
Rather than the experience being completely negative by the coach cutting ties and moving on, he could use the experience as a cautionary tale to future players to keep their focus on the field. The coach could maintain a relationship with the ineligible player to ensure that his academic career becomes the new focus. Regardless of the sunk costs of time and energy, the best parts of their shared experience – the relationship, the bond, the dedication, the character building, the leadership – can be redeemed with a set of new choices.
I’ve learned that sunk costs are an opportunity to choose our gains and losses now in order to think forward and build something even better for the future.