Abandoning ship in times of tumult can be easy because the choice is clear to cut bait and scram. Much harder is bailing when the ship is sailing smoothly but you’re not on your preferred course. What do you do in that case?
Let’s look at examples of people making tough decisions based on logical thinking. Mark Zuckerberg and Bill Gates (of Facebook and Microsoft fame, respectively) both began their college careers at the most prestigious university in the world, Harvard.
Both were shoe-ins to larger corporate jobs at a tech company in Silicon Valley, an elite bank on Wall Street, or an enviable medical residency in their specialty of choice. The world was their oyster simply because they attended an institution whose name alone opens doors few others can.
These two had strong incentives to stay on their figurative boat to its destination and figure things out along the way. However, both had lofty dreams that differed from the charted course, dreams that didn’t require graduating at the top of their classes.
So, should these two have stayed the course, finished their studies, and graduated Magna Cum Laude? Anyone who wants to share a photo online or write a term paper would not think so.
Hindsight is 20/20 in their cases, but they knew better outcomes awaited outside those hallowed halls. They did not fall victim to placing greater value on the time and money they had already committed (their sunk costs), and instead chose different paths more to their liking and have been handsomely rewarded ever since.
How the Past Affects the Present
Let’s unpack how sunk cost can affect a person’s decisions. Making a decision with sunk cost in mind frames continuing an obligation as more prudent than changing course, even if the alternative is a better option. Stated a different way, factoring in sunk costs can make someone compelled to stick with a series of commitments that compound over time.
Take my experience as an example. I was admitted into a top economics PhD program and felt my path had been set. However, two years in, I had a change of heart as I saw the opportunities that lie ahead and the obstacles between where I was and where graduation got me.
I had made a mistake but I had already committed my efforts toward my PhD and sunk a great deal of time into following that decision. What should I do?
The safer choice was continuing my studies and hoping for the best. But doing this would be similar to gamblers making the grave mistake of throwing good money after bad thinking their luck will turn around.
They find themselves thinking “I’ve already spent this much money and have to keep going” but secretly know there is little chance of being rewarded at the end of the game.
Thinking like this wasn’t smart so I weighed my options and decided to leave with my Master’s as a consolation prize. It made a lot more sense than toughing out an additional three years of my life to get a degree I didn’t entirely want.
Now, I work as a senior financial analyst for a Fortune 500 firm, earned my CPA, and am building a personal finance blog to share my knowledge and perspective with the world. I’m happy with where my life is taking me.
I charted a different course from the one I originally embarked on and have landed in a more appealing destination. I didn’t allow sunk costs to affect me and chose the more appealing path.
To read more about sunk costs and why humans continually factor them into their decisions, read my follow up post here.
About the Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.
Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions, tax reform in 2018, or other useful tax topics. I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.
Please continue to watch the site for more to come and post below with your questions or comments.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.