Sunk Costs

Let bygones be bygones – why the past shouldn’t dictate the future.

I was always in awe of people who knew what they wanted to do from a young age. By the time I turned 25, I had worked as an air hostess, a holiday camp representative, a cocktail waitress, a personal trainer, an HR assistant and an events organiser. Then, on my travels, I met a doctor who cured me of my awe. Our conversation went like this.

“What made you decide to become a doctor then?” Me, big-eyed and flirting a lot.

“I studied medicine.” Him, monotone and taking a great interest in his pint. “This beer’s excellent!”

“Yeah, but you’d decided by then.” Still twiddling my hair and not holding back my obvious interest in this floppy-haired saver of lives.

“Not really. I liked science, fell into studying medicine, and, well, I’d invested a lot of time and money by the end of it, so now I’m a doctor.” His tone had become a bit unsettled, and he drained half his pint. “What?” He noticed my expression change, then went back to his beer, staring deep into the glass.

I hadn’t mastered the art of a poker face then, and I’d stopped twiddling my hair halfway through his response. He may have still been doing a worthy job, but he’d walloped to the ground from that pedestal I’d put him on. He didn’t have life figured out any more than I did, and he didn’t seem to have given it much thought.

Over the ensuing years, I had many conversations like the one with the cute doctor. Some people had been very passionate about something at the start and had pursued it for all the right reasons. However, passions can wane. Rather than let them die a natural death, many kept them on life-support because, like the doctor said, they’d “invested a lot”, whether money, time or effort.

During a university lecture and a period of being off track with my life without knowing it, I had a revelation. The class was on international accounting and was part of my MBA. The lecturer was a fellow Brit I bonded with over Austrian wine. She picked up on the tendency my eyes had to glaze over whenever we talked numbers, as was often the case in her class, and she tried to reel me back in. I struggled during that module. I was good at many things, but I found accounting boring, except for sunk costs.

A sunk cost is an investment you’ve already made. It can’t be refunded. In economics, there is a bygones principle, stipulating that these costs are irrelevant and should not be considered in current or future decision-making.

I found this concept fascinating because many of us ignore this principle in the way we conduct our lives. I thought back to the doctor, and how he’d opened up, after a few beers: the trip I met him on was a break to find himself. He was proud of his achievements, but he wasn’t living the life he wanted to because he was letting past investments hold him back. In the business world, this would be seen as an irrational approach. These investments would have been written off long ago.

I’ve worked on my poker face since then and have coached people in similar situations. Many reveal they’re willing to continue with an unfulfilling status quo to justify the time, effort and/or money they’ve already invested (often in their career or a relationship). They fail to focus on the gains of letting go because these aren’t yet concrete enough, whereas the sunk costs are. Questions like this can help:

“How long have you been feeling unhappy/unfulfilled?”

“How many more years/months are you willing to feel like this?”

This turns the investment situation on its head: the lack of fulfilment becomes a completely new negative investment, which grows alongside the period of indecision.

Another question to get us thinking is:

“Knowing what you know now, would you follow the same path again?”

Coupled with:

“Now you’re wiser, what will you do with that knowledge?”

This adds value (the knowledge gained) to the current situation, pulling us away from the false value we’re attributing to the past investment.

My accounting module was just one of my sunk costs in life. I was on the wrong path, thinking a finance education would ensure a successful management career; it might have, but it turns out that didn’t suit me, after all. I’ll never get those hours back, looking at balance sheets in excruciating detail. I won’t become an accountant to justify them, though.

Some people are lucky and know what they want to do from a young age. They follow that through for their entire lives. The rest of us take longer to decide, or we change our minds. That’s fine, if we change track when we do, knowing when to cut our losses. I hope that doctor did and that he's doing something he enjoys – perhaps he’s brewing his own beer somewhere now.