Sunk costs
I have been familiar with the concept of sunk costs for a while. We studied it in my MBA, and even before that my ex had a good grasp of it. The idea is that after money is spent, it's spent, and so it shouldn't weigh into decision making about value or further investment.
Then I ran across the concept again in Fred Hilmer's book about being the CEO of Fairfax (not a bad little book, by the way - my boss lent it to me). He explained the concept by asking us to imagine we've already invested $10 million in a project, and it was not yet viable, it would require another $1m investment to become viable and have a chance of turning a profit. Many people would say, well, I've already invested $10 million, I'd better see it through to make that money worthwhile. But as he rightly pointed out, that's not a good way to make investment decisions (the technical term for it is I believe "throwing good money after bad"). The $10 m is already spent, it's gone, it's as if it gets reset to zero. Your decision is really, should you invest $1 m in a project that is not looking very viable at the moment. Answer should be no.
So, I shouldn't be feeling guilty that I haven't been going to Wittgenstein class. I went to two, but have now missed four, of a total of 16 (and will miss at least two more from being out of town). It was kind of expensive, I spent some of my bonus on the tuition, but that money's gone now, spent. The decision whether to go or not, on any given Thursday, can be made from scratch, as if from zero. It was kind of instructive going to the first two, but I realised that I like the amateur groups better than the paid groups, and there are lots of loud-mouths in the class who dominate and say not very interesting things. I already know more about the subject matter than most folks in the class. And Thursday's not a good night - always the night I have to stay back and finish things for the end of the week, I'm always exhausted but can't sprint the last little bits of energy because I have all of Friday to get through, and tonight I have laundry and grocery shopping to do which both some more important and more rewarding. I keep calculating the decision from scratch and keep deciding not to go. How guilty should I feel?
If I imagine my sunk cost as a charitable contribution to the teacher, for which I get nothing in return, I don't feel too bad about it because she's a good person and a good teacher for that kind of thing and I'm happy to support her. And even if she doesn't get very much of the tuition fee and most of it goes to the CCE, that's a good cause as well, I'm glad it exists and am happy to support it, as the organisation that brought me Opera class and changed my life. In fact, if I imagine that part of this tuition was actually the full cost of Opera class, it's still worth it, because I would have paid the total amount just for those six weeks and that experience.
So I shouldn't feel guilty. I may not go to Wittgenstein class again at all. No refunds available, no tax deductions given, but that's okay. The money is sunk. But it's what I do with each new Thursday that is the important decision.
Then I ran across the concept again in Fred Hilmer's book about being the CEO of Fairfax (not a bad little book, by the way - my boss lent it to me). He explained the concept by asking us to imagine we've already invested $10 million in a project, and it was not yet viable, it would require another $1m investment to become viable and have a chance of turning a profit. Many people would say, well, I've already invested $10 million, I'd better see it through to make that money worthwhile. But as he rightly pointed out, that's not a good way to make investment decisions (the technical term for it is I believe "throwing good money after bad"). The $10 m is already spent, it's gone, it's as if it gets reset to zero. Your decision is really, should you invest $1 m in a project that is not looking very viable at the moment. Answer should be no.
So, I shouldn't be feeling guilty that I haven't been going to Wittgenstein class. I went to two, but have now missed four, of a total of 16 (and will miss at least two more from being out of town). It was kind of expensive, I spent some of my bonus on the tuition, but that money's gone now, spent. The decision whether to go or not, on any given Thursday, can be made from scratch, as if from zero. It was kind of instructive going to the first two, but I realised that I like the amateur groups better than the paid groups, and there are lots of loud-mouths in the class who dominate and say not very interesting things. I already know more about the subject matter than most folks in the class. And Thursday's not a good night - always the night I have to stay back and finish things for the end of the week, I'm always exhausted but can't sprint the last little bits of energy because I have all of Friday to get through, and tonight I have laundry and grocery shopping to do which both some more important and more rewarding. I keep calculating the decision from scratch and keep deciding not to go. How guilty should I feel?
If I imagine my sunk cost as a charitable contribution to the teacher, for which I get nothing in return, I don't feel too bad about it because she's a good person and a good teacher for that kind of thing and I'm happy to support her. And even if she doesn't get very much of the tuition fee and most of it goes to the CCE, that's a good cause as well, I'm glad it exists and am happy to support it, as the organisation that brought me Opera class and changed my life. In fact, if I imagine that part of this tuition was actually the full cost of Opera class, it's still worth it, because I would have paid the total amount just for those six weeks and that experience.
So I shouldn't feel guilty. I may not go to Wittgenstein class again at all. No refunds available, no tax deductions given, but that's okay. The money is sunk. But it's what I do with each new Thursday that is the important decision.
posted by Ellen at 8:09 pm
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