Know When To Bail: Sunk Costs

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Picture the scene. It’s the evening of the Lady Gaga concert/Yankees game/yoga bootcamp. You bought the tickets months ago, saving up and looking forward to it. But tonight, it’s blizzarding. And you’ve had the worst week and are exhausted. And nothing would make you happier at that moment than a hot chocolate and pajamas, not even 16-inch pink hair/watching Jeter/nailing the dhanurasana.

But you should go, anyway, right? Because otherwise you’d be “wasting your money”?

Think again. Economically speaking, you shouldn’t go. Welcome to “sunk costs.”

In A Nutshell: People Are Bad At Cutting Their Losses.

“Sunk costs” is the economic principle that what you have spent is already gone. In other words, you can have spent $200 and have an unpleasant evening, or you can have spent $200 and have a great evening. Either way, you’ve already spent the $200.

Robert Leahy, a psychiatrist and Director of the American Institute for Cognitive Therapy in New York, says, “A model of good decision-making is always based on future utility or future payoff. For example, a woman goes out and spends $300 on a dress and at home tries it on again but it doesn’t fit, she looks awful in it. She may be reluctant to get rid of it because she may think, ‘Oh my god, I put all this money into it!’ She’s honoring the sunk cost.”

More often than not, people will waste money (and time) in order to justify costs they’ve already spent–it’s like throwing good money after bad. It applies to not only financial decisions, but professional and relational ones as well.

Know When To Bail.

One of the smartest moves we can make for our money and time is to know when to cut our losses. The irony of a sunk cost is that the more we have put into it, the harder it is to abandon it.

The first key is to recognize a sunk cost. Leahy advises, “Ask yourself, am I staying with this relationship or at this job, computer, house or this piece of clothing because I’ve already put money into it? That’s sunk. That’s all down the drain. If I had never made this commitment, would I go out and get it now? If the answer is no, then you probably should try to get rid of it as soon as possible.”

According to Leahy, it’s also important to know when to bail because of missed opportunities. “If I stick with this commitment to this past relationship, car, or house, am I losing out on other opportunities?” says Leahy. Your money and time can be better spent on new experiences you may not be as open to when you’re hanging on to old things.

How to apply the principle of “sunk costs” to your life:

  • Walk out if the movie is bad–your ticket is already a sunk cost. Do something fulfilling with those two hours: take a walk or enjoy a book over a cup of coffee.
  • Don’t read those magazines if you’re not enjoying them–the subscription is already a sunk cost. If your time is better spent on a hobby, do that instead. And make a note to yourself not to renew.
  • Consider selling a flagging stock and declaring your losses–just be sure to talk to your accountant about the best times to do this (usually end of year).
  • Go through your closet (and house) and donate or sell expensive items you are no longer using–their purchase is a sunk cost, and holding onto them just because they were expensive may make you feel less guilty, but is not the best decision for you.
  • End a relationship if you feel it isn’t going anywhere (friendship, romantic relationship)–the time you spent is already a sunk cost. You’ve probably learned valuable things, so don’t see it as wasted time, but not every relationship is meant to move forward.

Do a Sunk Cost Inventory of Your Life.

Humans aren’t rational by nature, and that’s why so many businesses rely on subscription or pre-paid models, so that we feel “invested” and force ourselves to partake of their product or services. Be savvy to this. Start with these three steps:

  • For the next month, start living by the “sunk costs” principle. Let things go and let money “go to waste” if you’re not really enjoying the things you’ve invested in.
  • Keep track of how much money you have spent on things that are not bringing you enjoyment or fulfillment.
  • See how much money you can save if you cut some of these things out of your life.

Do this for small-ticket investments like package classes, subscriptions and items you’ve purchased, as well as big-ticket investments like house, car, job and relationships.

The principle of sunk costs isn’t about living a life without commitment or follow-through. There are things we may not feel like doing in the instant but we know deep down are good for our well-being (exercise and healthy habits are just one example, and all worthwhile relationships require hard work).

But it is about getting in touch with what we truly want now, not what we think we have been wanting all along.  It’s about spotting our own patterns in honoring sunk costs, and making better decisions in the future. Clearing the sunk cost “baggage” (financial and otherwise) from our lives will make room for better things. Because sometimes walking away is the wisest decision we can make.

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  • Anonymous

    This is awesome LearnVest. Can I do this with my gym sessions? I hate going most of the time! Thank you, excellent daily. Really valuable for thinking about bailing and feeling less guilty. And, It is all about the guilt.

  • Ezonomics

    Interesting post! In behavioral economics terms, this is similar to the “endowment effect”. We tend to overvalue things simply because we own them – and can be reluctant to sell. As noted in your article, this can mean people feel less willing to sell falling stock market shares. A video on eZonomics tells how this can spread to other investments, such as real estate. Go to http://www.ing.com/ezonomics/showdoc.jsp?left=false&docid=484073 to take a look.

    • Anonymous

      thanks for sharing…this is so interesting. Watching now!

  • Lauraelorenzetti

    This was a great post to read right now — both for my financial life as well as my personal decisions. How often do our relationship patterns mimic our financial ones? So true!

  • http://neatfreakwannabe.blogspot.com Jenna

    This was a really interesting post to read. When money is tight, it can be really hard when you feel like you are “wasting” money if you don’t keep/use something you paid for – but it’s true – that money is out the door. We almost count it as a personal failure sometimes – punishing ourselves that we “Must Use!” these things to make up for the mistake of paying for them. I guess we all should just take a step back, eliminate the time- and space-wasters from those sunk costs, and try to learn from our past so that we don’t do it again!

  • Tikitock

    Interesting post, though you don’t have to lost all the money to walk away. Ex: You mentioned walking out of a movie. If it is less than half way through, the theater will refund your money or give you a ticket for future use. The dress could be returned or resold. Etc…

  • AA

    It’s hard to let go of things though…there’s always that “but what if I miss out?”nn-what if going to the concert turned out to be the most enjoyable thing?n-what if the article in next month’s magazine is lifechanging?n-what if the movie gets better after I walk out?n-what if I give away the extra mattress because it takes up space?n-what if I lose weight and the dress fits better?n-what if I dump this SO and realize later how good I really had it?nnI understand this is part of the whole rationalizing, but…it is definitely a mental struggle.nnThe other problem I see is the whole remorse thing can really bite you.nn-I hear later that the concert was awesome and agonize for days I didn’t go.n-I see the magazine in the newsstand and have to buy it for $5.50 this month and the same thing happens again in a few months when the discount subscription I’d had and cancelled was only $6/yearn-I hear the movie wins an Oscar and I read so much about it I decide the ending is probably worth it after all so I end up paying additional money to rent the DVD (as well as having to sit through the bits that made me walk out the first time because I can’t remember them)n-A friend suddenly needs a mattress for a kid and I don’t have mine to offer up.n-I lose weight and now I don’t have a dress for that formal occasion. I then go on a dress buying spree because I keep trying to replace that wonderful dress I used to have and nothing else measures up.n-I dump the SO…and end up going through many a lot worse before ending up realizing that it was all my fault after all and really, he was the best thing that ever happened?nnI’m not saying that this article isn’t spot on…I’m just saying it doesn’t acknowledge how deep the mental struggles really go or the possible penalties of giving up to early that we all know deep down that makes us feel that much more attached to “sunk cost” investments.

    • JEB

      AA–this is pretty much what I do to myself on a daily basis! You have captured my thoughts (and reactions to this post) perfectly. But lately I have noticed that the stress I place on myself through the waffling back and forth, the justifying, the analyzing of the what ifs, is usually not worth it. I’ve started trying to just make a decision and deal with the consequences of that decision. Because deciding and not stressing is worth more to me now than the money I would be “wasting” by giving up something I have already spent money on.

    • Danie

      This is true but you can’t live your life always wondering “what if” and over-thinking and over analyzing everything. 

      You have to do what is best for you in that moment, day, year and then move on to the next. 

      You have to really let those things go when you let them go. 

  • Jolene Nicotina

    Food and dining out are often “sunk costs.” How many of us have forced ourselves to finish a meal that we didn’t like, or that was just too large a portion, in order to justify spending the money on it? The extra calories or torture to your palate isn’t worth it.

    • Amira

      i do this ALL the time because money is tight at my household.

  • Kj4dck

    Wow did I need to read that . Good advice life is too short

  • Celiaweems

    Excellent article…

  • Pegi

    I think women have a hard time giving themselves permission to make a mistake…who in their right mind goes out in a blizzard anyway except a sled dog??? It’s all about your confidence in yourself that you are entitled to change your mind and not be self-punitive, and owe no one an explanation….(except the sled dog waiting to take you to the concert)
    Pegi @thefinancialwhisperer.com

  • Pegi

    I think women have a hard time giving themselves permission to make a mistake…who in their right mind goes out in a blizzard anyway except a sled dog??? It’s all about your confidence in yourself that you are entitled to change your mind and not be self-punitive, and owe no one an explanation….(except the sled dog waiting to take you to the concert)
    Pegi @thefinancialwhisperer.com

    • http://www.bmwysp.deviantart.com Jennifer Megan Varnadore

       I agree. I have a hard time with that as well.

    • http://www.bmwysp.deviantart.com Jennifer Megan Varnadore

       I agree. I have a hard time with that as well.

    • Amira

      i agree pegi. i find myself always apologizing for things even if i wasn’t at fault. it’s just how i was raised. but, i do get tired of it and i have grown a bit more confident now. however, i still feel that at times i let people roll over me for their ends.

  • Shbfam91

    This post came at the perfect time – I’ve been debating dropping my gym membership.  I rarely go (even though I NEED TO!), but my pricing structure is a grandfathered ‘low’ price that if I drop I’ll never get back, and I shudder to think of how much money I’ve already sunk into this place!  This helped me make the hard decision – thank you!
    Strangely, I had already begun using this principle when it comes to books and movies.  Although I don’t buy many anymore (borrow and stream), I’ve realized that my time is more important – I have a 100-page and 15-minute rule that I use.  If I’m not interested by then, I drop it and move on!

    • Anonymous

      Love that tip, Shbfam91 – thanks for sharing!

  • Jennifer Campbell

    I also have the opposite problem in that I procrastinate in buying those tickets (what if I don’t feel like going or something better comes up) and end up going and paying more at the door. 

  • Amber Lee

    What if the sunk cost is something larger and more impacting like a property that you can just barely afford/don’t like/can’t sell?

    • Linds

       I am in the EXACT same situation!!!

  • Timothy Balmer

    This is good and all but it kinda contradicts itself in some ways.