Sunk Costs: An Economics Lesson In Moving On

In economics, a sunk cost refers to a retrospective cost that has already been incurred and cannot be recovered. Traditional economics suggests that sunk costs should not influence business decision-making, as it would not be rationally assessing a decision based on its own merits. But, as behavioural economics proves, this is not always the case in real life. Business decision-makers are after all humans, and humans are prone to loss aversion - i.e. they have a tendency to prefer avoiding risks rather than acquiring gains. All in all, this means decision-makers end up taking into account these irretrievable costs, despite the fact that it is irrational to do so.

I didn't do Economics as my undergraduate degree, but a lot of my friends did. A few in particular love this "sunk costs" inside joke, where they'd use its theory in day-to-day decisions. They'd try to describe to me what it meant, but usually to my confusion (thankfully, Wikipedia is a thing). Basically, it just teaches that you should just accept that some things are hopelessly gone - just because you've gone down a certain path does not necessarily mean you should keep going the same way, so stop living in the past.

For example, if I had already spent money in the game League of Legends, that is a sunk cost (true example) - I cannot get that money back. Now, I have another chance to spend even more money, and as a stupid human with stupid feelings, I feel like since I've already invested money in the game, it would almost be a waste of that first amount to not spend more (also a true example). WRONG. The mere fact that I had spent money in the first place should not affect whether I spend more. It would not be rational. Result? I spend more money. Why? Because, as I said, I'm stupid.

So what other sunk costs do we fail to ignore? What about time? Time is definitely something we spend (literally, every second of our lives), and it is definitely irretrievable. No man on this world has the power to take back the time he has lost. So when we invest time into things in our lives, should we be rational and not let it affect our future decision-making?

Something I made in reference to the Cantonese song, 
Tourbillon (陀飛輪) by Edison Chan (陳奕迅).

Instead of Economics, I studied Law at university. About halfway into my second year, I realised I had made a grave mistake. Not only was I not particularly interested in my degree, I was no good at it. At all. Now, I had the option to either a) change subjects, possibly even university, or b) carry on with my chosen degree. Sunk costs dictate that time lost is lost; there's no going back. Given my projected trajectory with the degree, I was predicted to defeat. So what did I do? "I've already come so far. It'd be a waste of the last one-and-a-half years to not do the rest." - I carried on. Economically irrational? Yes. The wrong decision? Retrospectively speaking, I have no regrets whatsoever. I got my degree in Law in the end, but it took my everything to do so. But I would do it all over again given the chance.

This got me thinking about other things we spend time on - like relationships. We invest time into them, to build and foster a bond with that person. But when a decision needs to be made, shouldn't we ignore time as a sunk cost? If we were smart, we would assess the situation on its own merits. Weigh up the pros and the cons, without the sunk cost in the picture, because what's happened won't change.

But in the end, we do take it into account. Because we're irrational and stupid? No - because it matters. Time in a relationship is what makes the connection deeper and more meaningful. I don't really believe in "love at first sight". What I do believe is that relationships of love require time, work and effort. Ask any experienced, married couple. Time does add value, and it does change the decision outcome. What I do agree with however is that it is only a single consideration. Obviously, there is always a lot more to take into account, and you can't be blinded by sunk costs like time. I hate the idea of 'settling' with someone (not to be confused with 'settling down') just because you've been together for a certain period of time. You're not going to get any of that time back by investing even more, so there's no point in 'sticking through with it' if that's you're only argument.

However, I think we should consider time invested, but only as equally important as time to be invested. Jumping back to economic theory, prospective costs are future costs that may be incurred if an action is taken. And these do matter to business decision-makers, because that loss can be avoided if the right decision is made - it's a risk. So when we consider our relationships, it's worth also thinking about the potential time we're committing to. After all, all time in the future eventually becomes irretrievable, too.

In the end, economics and love don't mix very well (no matter what my friends say). Love just isn't an economical decision - it's too hard to be rational with it. Heck, we can't even do it right and avoid loss aversion when we're making business decisions, let alone ones that the heart is involved with. Ultimately, we dwell on the past, whether we mean to or not. But hopefully, we try to think ahead as well. We might not get any of our time back, but in the end, aren't we all really just trying to avoid bankruptcy?