Medliorate

Improving medical students

Rational Decisions with Sunk Costs

Posted by medliorator on September 23, 2008

I believe the best way to remember sunk costs is to pretend you were starting with a fresh decision.  Eliminate the past and pretend you were starting over.

a sunk cost is a term from economics to describe money (or time, energy, etc.) that has already been spent in a past decision.  Since the money is gone, it shouldn’t be a factor in making new decisions.

My friends and I had spent $12 to go to a show  …there was another party (and DJ) that we would enjoy more, less than 2 minutes away, for $7.  Some of my friends argued that we should stay here, because we paid $12, so we might as well enjoy the band… A better way to phrase the decision was to pick between staying at this show for free or going to the other party for $7.

A lot of University students need to face a sunk cost problem.  Midway through a degree program, they decide they don’t want a job in their chosen field.  Should they finish the degree anyways or switch?

This is a complicated decision with many factors, so no simple trick can automatically decide the right answer.  However, if you view this problem through the sunk cost lens, you’ll realize that the time already put forwards towards the degree isn’t important.  Whether that time was invested or wasted, it can’t be changed, so you need to focus on the future.

Don’t Forget Sunk Costs, Stupid! [Scott H Young]

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