Sunk Costs are Sunk

One of the cornerstones of economic analysis is what we call "marginal thinking."  Marginal thinking simply means that we look forward one step from wherever we happen to be, compare costs and benefits of actions that we're considering, and take those actions whose benefits outweigh their costs. It takes some calculus to prove, but making marginal decisions in this way tends to produce the highest level of available well-being for those that practice it. 


Despite the fact that we do marginal analysis every day, it's still easy to fall into the trap of chasing sunk costs.  Sunk costs are costs that have already been incurred;  the saddest thing about sunk costs is that no matter how badly you want to, or how hard you try, you cannot get them back.  And making decisions based on what has already occurred violates the forward-looking principles of marginal analysis.


Consider, for example, the moviegoer who plunks down $15 to sit through what might possibly be the worst movie of all time: "Dude, Where's My Car?"  Within minutes, the moviegoer knows the movie will be terrible, but sits through the rest of the movie because, "I've already bought the ticket."  Or the college senior who discovers that she hates French literature and never wants to speak another word of French, but continues taking courses in the major because, "I've already got 20 credit hours."  Both of these people are choosing an action based not on what is to come, but what has gone before.  The moviegoer should be asking, "What else can I be doing with the next two hours that is better than watching this stinkpot of a film?" The student should be asking, "What field of study can I choose that I will enjoy more than this stinkpot of a major?"


I recently found myself guilty of chasing sunk costs when I spent the weekend with a friend of 32 years.  At the end of the weekend I realized that I really don't like him, have not liked him for many years, and that I spend time with him primarily because we have a shared history. My friend is a human version of "Dude, Where's My Car," and it's time I realize that this is one movie that's not going to get better if I wait.  Every minute I spend indulging my once-friend is time away from more valuable uses...and so I'm walking out of the theater.