Have you ever bought a ticket for a movie and went in to watch it, only for 30 minutes in to find out you don’t like the movie at all? By this time, you already invested 30 minutes of your time, and the price of the ticket, should you continue to watch the rest of the movie or do you leave and do something else? Most people would choose to watch more since they’ve already commit to it, but an economist would do otherwise!
When people feel the need to continue to pursue something just because they have already spend their time, money, or energy on it even when it causes them more inconvenience is called the Sunk Cost Fallacy.
People often made wrong decision because of this concept. When making decisions, they always consider the time and money they already spent on it. This is because they think that by continue to do it, they can recapture some of the loss back, but they fail to consider the time and money they wasted even more by continuing the activity.
The same goes for decision-making for your business. For example, if you decide to open up a store, and your total cost is $80,000 and your predicted total revenue is $100,000. However, after you already spent $40,000 on your store, you find out that your total cost is actually more than the first predicted one. Your total cost is now actually $150,000. At this rate, should you continue or not?
You shouldn’t! Of course, if you know from the beginning that you won’t get any profit, you wouldn’t have started the project. However, since you’ve already spent the $40,000, it has become your sunk cost. If don’t continue with the project, you will lose $40,000, but if you do, you will only lose even more, you will lose $110,000. This is called thinking at the margin, and in economics, we love thinking at the margin!
Sunk costs can also be fixed cost. Fixed cost are the cost that we already spent, and doesn’t actually affect our output. So, when firms make decisions, they also do not consider fixed cost, as they already have spent it and it can not be recover.
So, the same should be done when we are making decisions in life! Even if you already spend your time, energy and money on it, it shouldn’t affect your future decision. Only continue to pursue it if it gives you future benefits or else, stop!
Remember to always think like an economist and never consider the sunk cost!
Funconomics 