Sunk costs and the true price of failure

Photo by Tierra Mallorca on Unsplash

In an interview on The Knowledge Project, Seth Godin defines sunk costs as a gift from your former self to your present self that you don’t have any use for. He recommends we ignore such gifts because our older selves did not know what our present selves do now, and newly available information makes using the gift not worth it.

My experience with sunk costs

Years ago I did my undergrad training as a mechanical engineer. At the end of it I earned a bachelor’s degree that I didn’t particularly care about. The realization had been long coming but the actualization in the form of a degree brought to the fore a question lurking until then: Do I pursue a career as a mechanical engineer?

I chose at that point to cut my losses and move on. If I had stuck to that path to justify the years of training, I may have ended up shouldering the future burden of pursuing a career I was lukewarm about.

Looking through Seth’s lens, the bachelor’s degree in mechanical engineering was a gift to my then twenty-two-year-old self from my callow eighteen-year-old self. I had gifted myself an expensive education with my family’s money and four years of my time, and after all that I did not want that gift.

Seth gives the example of a construction worker with misspelt advertising signage around town. He is reluctant to change the signs because he can only think of what he has paid to have them made, not how it may cost him by way of future business. He is good at his job but his incorrectly spelt marketing message signals incompetence because of which he is losing customers without even knowing it.

We tend to overestimate past investments and underestimate future costs. When it comes to jobs, we are likely to rationalize a poor choice (causing unhappiness) as a success (offering security). We may also tell ourselves that ignoring sunk costs is very expensive by factoring in the emotional cost of the process of disengagement — imagine telling your spouse that the shoes they got for you after an entire afternoon’s labor on their last trip abroad don’t fit you!

How can we ignore sunk costs?

Sunk cost fallacy is continuing with something in the face of its questionable utility simply because you have previously invested too much time, money, and/or effort into it. Avoiding it can save us much.

Consider the future costs. A decision of your former self is beyond the control of your current self. You can’t decide now that you should have kept the sushi in the refrigerator last night. But a decision for your future self is something you can make rationally. Making that choice could be hard if the sushi was expensive, delicious, or both. The memory of the sushi could suddenly make you think of your own constitution as hardier than what it truly is. Not letting go of the sushi as a sunk cost clouds your thinking. In order to not give in to the pull of retrospective costs, consider the prospective costs you may have to pay if you continue: If you eat the spoiled sushi it could lead to a bad tummy, medical expenses, and days lost at work.

Attach zero value to past investments. Remember Seth Godin’s description of sunk cost? A gift from your former self to your present self that you don’t have any use for. Gifts come free (when it is you that has gifted yourself!). Tell yourself that the past-you paid for this stuff with his time and money, not the present-you; the present-you has not put a dime or a minute into it.

A corollary to this would be to attach a higher earning potential to your current self. You made this investment in the past, but you earn better now so you can recover it sooner. My first job covered my undergrad tuition fees of four years in less than a year.

Develop optionality. My brother-in-law was passionate about pursuing music as a career but he had to complete college first. So he taught himself to compose harmonies while he was an undergrad. After he graduated, he found for himself gigs as a session musician from where he was able to take a shot at pursuing music as a career. Preserving optionality is recommended as a means to deal better with an unpredictable future. Developing optionality is equally important. Often, the sunk time costs of a long-term project you aren’t excited about can be mitigated if you use some of it to prepare for the future. It was easier for my brother-in-law to accept the three years in college because in that time he managed to teach himself a set of skills to help him in his chosen future.

When we have put in time and effort to earn something, and we realize afterward we don’t really want that thing, it is the investment made into the process that makes it hard to ignore. And when we are the recipient of the sponsored efforts of others, like family, it is the realization that someone important to us has incurred a cost for us that makes it hard for us to ignore the cost. This awareness could have a disproportionate impact on important decisions, both personally and professionally, especially for young adults.

Thanks to Atul Sinha for reading and commenting on a draft version of this piece.