Once you’ve invested in or bought something non-refundable or that can’t be changed because it was in the past, you may begin to believe in the sunk cost fallacy. The fallacy is that now you’ve done it, you’ve got to stick with it or all the money/time will go to waste.
It can be something like going to a movie even though you’re sick because you’ve bought the tickets. Continuing with tennis lessons you hate because you’ve already put so much time and energy into them. Or, it can be throwing good money after bad by investing in a stock, business, project, etc which you don’t believe is going to succeed and which is losing you money.
I think there are two good ways to handle sunk costs.
1. Give it up and get rid of it.
Sometimes there’s no point anymore. Maybe you’ve taken tennis lessons for 5 years and found you really hate it now. You may feel bad about quitting because you’ve put so much time and energy and money into that.
But think about how bad you’ll feel another 10 years down the road. You’ll have spent even more money and wasted even more time.
What’s past is done. Forgive yourself if you feel guilty. Don’t beat yourself up over it. Just think what a good decision you’re making now. All you can control now is the future.
This can also be for small things…maybe you’ve got tickets to a basketball game but driving conditions are icy or you’re feeling very sick. Would you risk your life because you’d already bought the tickets? They’re bought and the money is spent either way.
Maybe you can catch the game on tv instead. It’s not the same, but neither is getting in an accident or having to leave the game because you’re miserable. Chicken soup and blankets while you watch are much more comfortable.
And perhaps a really sucky stock should just be sold (though I couldn’t tell you which ones to sell and which might go up). Whatever you do, if it’s turning out to be a bad stock don’t buy more. There are advantages to buying in a down market, but there’s a difference between a down market and a bad stock.
2. Stop and find a way to work with what you have.
Maybe you don’t want to keep paying for tennis lessons. But that may not mean getting rid of your equipment because you might feel like using it and you’ve got the skills.
When I stopped taking dance lessons, for instance, I saved the basics—1 leotard, 1 pair tights, 1 skirt, 1 pair slippers. Years later those are coming in handy. If you’ve bought an exercise machine, see if you can find the discipline to use it before you give it away. Sure it may have been a bad investment, but you have to forgive yourself and move on.
However if all it’s doing is taking up space and causing guilt, then it’s time to go back to option 1 and just get rid of it.
Whether or not you kept the lost cause, try to reframe the experience. Micah has a B.A. in computer science but he’s now finishing a doctorate in philosophy. He found that the skills of designing abstract systems, making sure everything is consistent, etc, were the same ones he needed for analyzing and developing philosophical systems.
Business failures may seem like a waste, but you often learn valuable lessons along the way—what to do or what not to do. They may build you valuable networking connections and inspire better plans.
Even hours spent correcting major html and css errors I’ve caused on my sites have taught me more about web design than just reading about it in books.
How do you respond when you realize that something’s not going to work but you’ve put a lot of money into it? Do you feel the desire to press on?
What poor decisions and sunk costs have you had to abandon or reframe?
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Congratulations Micah on finishing up on your PhD. in Philosophy. I just finised my MS IT and I’m currently working on an MBA in Information Management. But, I’m curious what made you decide to come out of IT?
Neat post. I have a tendency to abandon and move on. Life is too short!
@JW, Micah realized that he didn’t want to spend the rest of his life as a code monkey. He liked the abstract part of it better than doing what he felt was repetitive and uncreative. He’d also gotten a minor in Philosophy and knew he enjoyed teaching…they just flowed together and I think it was a great decision.
Hi Mrs M – five years would be an awful long time to play tennis and not like it.
If I was sure something was not going to work, I’d get rid of it. I used to be terrible for holding on to things I’d had for years. And believe me, once you start getting rid of all that clutter, it seems easier to give up the bigger things somehow and not regret the loss or the time and money wasted.
I’ve lost tens of thousands through cutting my losses and I would do it again tomorrow if I had to.
Relationships are much the same – I spent years in a bad marriage because I kept hoping it would get better. And my regrets about those lost years are probably deeper because I hung on too long.
@Cath: I know just what you mean. I moved to a new state to be near a new love and thought everything would go well, the signs were good, and six months later it was all going south. But I held on because I felt stupid for taking that big of a chance.
Well, I got my daughter out of not cutting my losses, so it wasn’t a completely bad thing, but on the other hand I’m stuck with him too.
I can be pretty good at cutting losses in other cases. But it depends, and even when I manage it, I feel like I’m just being a quitter. And there is some merit in not being a quitter, but where do you draw the line between giving something up that is not serving your life purpose, and giving up just because things got difficult?
You make some excellent points. In the market, I once read some advice given by a well-known financier. Someone like J.P. Morgan or John Rockefeller. If you make an investment, the best thing to do is to re-evaluate it. If you had the money today that it would be worth if you sold it now, would you buy the same stock again? If not, you should sell it and invest in what you see as better. There are a bunch of caveats in this. First, getting out of one stock and into another will cost money. So you have to compare what you see if the future of the current stock versus the future of the other one if you invest what is left after getting out and getting in. If you make a bad decision cut you losses. Anything else sounds a lot like not being willing to admit you made a mistake.
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