When Sunk Costs Lead to Larger Opportunity Costs
Change is a constant in life, and yet, as creatures of habit, we tend to seek familiarity and comfort in our daily lives. As such, we may stick with the status quo more often and longer than we should. Ask yourself the following questions:
Have you ever continued a project at work you knew wasn’t going to succeed simply because you’ve already invested a lot of time and effort into it?
Do you know a friend who has stuck with the same partner for much longer than they should have because they’ve been together for years and have too much invested?
Have you been staying at the same job for a while even though it’s been making you unhappy?
Rationally speaking, behavioral economics tells us that once the costs outweigh the benefit of an action, we should stop the behavior. However, we’re all human and that doesn’t always happen. Here’s an experiment by researchers Arkes and Blumer to illustrate:
The researchers gave Ohio and Oregon college students the following scenario:
You’ve spent $100 on a ticket for a ski trip to Michigan and a $50 ticket for a ski trip to Wisconsin.
You think you’ll enjoy the Wisconsin trip more than the Michigan trip.
As you handle your two tickets, you realize both are for the same weekend!
Unable to sell or return either ticket, you choose one trip to go on. Which do you choose?
The researchers found that 54% of the participants chose the Michigan trip, the trip that was thought to be less enjoyable! Based on traditional economic theory, since both trips are paid for and they can’t get their money back, we would expect all participants to choose the Wisconsin trip but the larger sunk cost of $100 seemed to influence their decision.
This type of “irrational” decision-making happens often in our professional lives. But think about it—the sunk costs are not just the time, money, and effort that have been invested so far and wasted. The most painful cost is the opportunity cost; that is, the loss of the opportunity to do something else that could have been done with that time, money, and effort that would have led to more success.
If you continue to work on a project that is not working, you will lose the opportunity to start a new, potentially more successful, project in that time. If you put the energy, budget, and human resources to continue a project that is already not working elsewhere, new opportunities will arise.
This is the "opportunity cost”.
When it comes to making professional moves, most people hesitate to change jobs because of the sunk cost of having worked hard and the status quo bias. By considering not what you are giving up by changing jobs, but what opportunities you are losing by not changing jobs, you can start seeing things from a different perspective.
In the age of the Attention Economy, it is important for everybody to be constantly aware of where they are directly their time and energy. To do so, they must first be aware of their cognitive habits and think carefully about them. Therefore, sunk costs are not only a loss of time, money, and effort, but also a loss of the next opportunity to succeed.