Sunk costs

If things go wrong, don’t go with them.
Roger Babson
1875 – 1967

Over the past few weeks, some of you may have received holiday gifts you don’t like, and you might be thinking about selling them on eBay or Craigslist. There’s an important business principle called sunk costs that you ought to consider; it’s actually useful in any number of life situations, so it’s a good lesson to learn and understand.

The idea of sunk costs is fairly simple: any past costs associated with a decision are irrelevant, because you can’t change the past; you should only consider current and future costs when making your choice.

Let me give you an example using a holiday gift. Let’s say your coworker gave you a Christmas mug and left the tag attached, so you can see that the mug retailed for $14.95. You don’t really need or want a Christmas mug, but when you go to the store to return it, the clerk will only give you $4.98 because all the holiday items have been discounted.

You might be tempted to keep the mug since you won’t get anywhere near the full price. But if you did, you’d be forgetting the principle of sunk costs. The original price is irrelevant to the decision. You still don’t want the mug, and you can still get some value from it if you return it to the store. If you let the sunk cost influence your decision, you’ll end up keeping something you don’t want or need. If you ignore the sunk costs and complete the return, you’ll get $4.98 that you can put towards something you do want. Ignoring the sunk cost frees you to pursue the best choice among the options now available.

I suspect that many of you would just re-gift the mug, so let’s consider a more complex example. What about someone in a job they hate? There are plenty of sunk costs that can influence their choice: the training process they went through to learn the job; clothes they purchased due to the company dress code; connections they’ve fostered within the company; even non-transferable retirement benefits they’ve accrued. But those factors can’t be altered — and they don’t change the fact that the person hates the job. The employee would do better to forget the time and effort already spent and start looking for a new position rather than continue to invest in a bad situation.

You can apply the principles of sunk costs to many common life situations: reselling a car, home or other investment; switching college majors; changing jobs or careers; even ending long-term relationships. Remember, you can never change the past; once spent, any resources of time, money, or emotional effort can’t be regained. All you can do is look at your current choices and make the best decision going forward.

If we could sell our experiences for what they cost us, we’d all be millionaires.
Abigail Van Buren

Copyright © 2019 John Chancellor and Cheryl Chancellor


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