Embracing Sunk Costs
The importance of learning to live with financial loss
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I majored in international economic development at college, which meant I needed to take a ton of economics courses.
Despite not learning much of practical value in these classes (or throughout college, for that matter — except writing!), there was one concept that really stuck with me.
This concept was the idea of sunk costs.
Considering sunk costs when looking at my own personal finances has shaped the way I look at money in significant ways.
Definition
Sunk costs can be defined as follows:
When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed….” Source: economist.com
The key words here are CANNOT be undone…[or] reversed...
Let’s break this definition down.
Think about it this way: You shelled out that not-so-negligible amount of cash on something that ultimately will add no value to your life or that you won't enjoy, so now you’re [insert negative feeling -pissed, angry, sad].
When I say a negligible amount, I don’t mean those 30 dollars you spent at the movies watching that film that really sucked and eating crappy, overpriced movie theater pizza (I’m more of a stale movie nachos kind of girl myself).
What I mean is, that 1,000 dollars paid for the flight you ended up scrapping since you had to stay working the last two weeks of August, and you booked with a really shitty airline that refuses to give you a refund.
I’ve made a couple of really stupid purchases that turned out to be sunk costs. Among them…
- An 800-dollar plane ticket to Mexico City I never took, and that I bought with a really shitty airline (i.e. no refund).
- Almost 50,000 dollars worth of student loans for graduate school abroad (I dropped out at the very end without the degree).
And there are so many more I could list!
It’s certain that you will find yourself facing financial loss throughout your life. There is no way out of this.
I’ve learned to embrace sunk costs for what they are: mistakes, lack of vision, and bad luck.
Why?
Categorizing an expense as a sunk cost may help mitigate the negative feelings that arise from overthinking about spending.
If you don’t embrace sunk costs, it might cause more good than harm emotionally.
It would probably not be too far-fetched to state that money problems are at the root of most people’s emotional distress. We worry about spending money, earning it, investing it, and even donating it.
Concerns about financial loss are of course warranted, but after a certain point, dwelling on that poor choice of lending your savings to the man you thought was ‘the one’ will get you nowhere.
Remaining frustrated about your mistakes, or angered by the betrayal of someone else, will produce futile pain that can lead you down the emotional rabbit hole.
Dwelling on past money losses will make you too risk-averse.
The biggest risk is not taking any risk.
Failing to view economic losses from the lens of sunk costs makes you much more cautious in your spending decisions.
This is not necessarily a bad thing.
The problem comes when you’re too cautious — overcautious — because you must guarantee a return on all your investments to avoid the pain of loss.
Guess what? Eventually, you’ll get screwed. That’s life! But I’m sure that the more risk you take, the more your wins will outweigh your losses if you learn from your previous mistakes.
Without letting go of the money you lost — categorizing it as a sunk cost — it will take you longer to move forward and build the life you desire.
Going after sunk costs may lead you to spend more.
This one consequence of not embracing sunk costs might be the most tricky to understand.
One of the biggest mistakes you can make once you realize you are facing financial loss is continuing to pour time and money into what has already run its course.
This is not always that obvious, though.
When I decided to drop out of graduate school with a 3.97 GPA and only one semester left, everyone thought I would ultimately regret it. This added to the emotional stress of making the decision.
What I realized back then was this: the several tens of thousands of dollars I held in student loans just from this program were a sunk cost. I was no longer interested in the field of study.
Moreover, the additional time, energy, money, and emotional effort I would have been required to supply to complete the degree were far more precious than the actual piece of paper I would get in return.
One of the most important things you can learn to do in life is to course correct. Let go of what did not or will not work, and move forward with the next part of your life
I’m certainly not saying that it’s easy to look forward and forget that you just lost all this money you worked so hard for and that you could have utilized somewhere more productive. It’s not easy to just quit big things you’ve already invested money, time, and effort in.
However, you need to realize that you will constantly face disappointment on your way toward progress, and financial loss is part of that game. Don’t attach any meaning about yourself or life to these losses, and extract the lessons and knowledge these moments have to offer you.
Learning to view financial losses as sunk costs allows you to persist despite your shortcomings, instead of you clinging to them as proof that you can no longer trust yourself or the world.
