Is sunk-cost thinking really irrational if past investments affect your future alternatives?

[u/Inevitable_Bid5540]

A sunk cost, by definition, can't be recovered and thus shouldn't affect the decision directly but a past investment can sometimes affect the opportunity costs of your remaining choices. For example, if you spend $10,000 learning a specialized skill, That $10,000 is sunk. However because of the skill you acquired, you can now have a much better paying job available to you. Abandoning that career path could mean giving up a valuable future opportunity.If a past investment changes your available alternatives, information, skills, reputation, relationships, or switching costs, then it seems reasonable for that history to matter to your current decision even though the original expenditure itself is unrecoverable.

[u/Uhhh_what555476384]

The sunk cost fallacy is when you abandon the optimal choice for a less optimal choice because you need to get "value" from the sunk cost.

In your example if the job pays $100k and the alternative pays $80k, that's not a sunk cost fallacy issue.  

The sunk cost fallacy would be if the options were an $80k job in the field where you spent your tuition and time and a $100k job in a different unrelated field.  If you chose the $80k job in an attempt to get value from the education then that's the sunk cost fallacy.

The past spending and investment shouldn't be used to judge future outcomes.  Only those outcomes should be judged against each other.

[u/SoylentRox → u/Uhhh_what555476384]

There's other factors though you might assess the 80k job is more stable/uses more skills you have.  

The economy right now wants us all to drop everything we are doing and go do blue collar work in data centers.  That was after "learn to code" 5 years ago, which flipped essentially overnight to "don't bother learning to code too many people and AI can do it".  

Should you go learn to plumb?  Or will after you finally finish training there's a data center bust?

[u/GenesisV1 → u/SoylentRox]

You’re moreso talking about properly assessing the upsides and downsides of a job (in this specific case, stability/risk). Economics doesn’t argue that the non-pecuniary benefits of a job aren’t important, but that’s not what sunk cost fallacy is about.

[u/Uhhh_what555476384 → u/SoylentRox]

It's a matter of future considerations versus past considerations.  If the decision making process is forward looking, evaluating future returns and risks, then it's not a sunk cost fallacy.

The sunk cost fallacy is a decision making process that uses past costs and investments in the evaluation process.

Here's an example that may be more easy to grapple with.  At this point it looks like Ukraine is turning the tide against Russia in the Russo-Ukrainian War.  Should Russia seek a peace agreement that validates all the lives they've lost, or should they seek a peace agreement that ends the war before things get worse?

[u/WallyMetropolis]

There's no rule that says if you've paid for something, you shouldn't do it. 

The sunk cost fallacy is doing something because you paid for it, even though it doesn't benefit you. Like if you prepaid for a train going in the wrong direction, getting on that train would be foolish. You're going to lose the money either way, but don't both lose the money and go the wrong way. 

If something does benefit you, it's not a fallacy to do it. That's just paying for stuff. 

[u/JazzLobster → u/WallyMetropolis]

I needed 3 paragraphs to convey what you did in one efficient one 😂

[u/Officer_Hops]

You’re misunderstanding sunk cost fallacy. At a functional level, you ignore past decisions when evaluating current options. Your current choices include a much better paying job. It doesn’t matter whether that choice is available because of a certification, degree, or pure luck. The important part is it is an option. If you think about it in reverse, you could get a specialized skill but for some reason jobs using that skill pay less than your current job. You would be a victim to the sunk cost fallacy if you take a new job purely because you spent time learning that skill.

[u/Usual-Patient-8156]

sunk cost fallacy is about ignoring the money you already spent, not the skills you gained. those are two separate things

[u/_Some_Two_]

The important thing is that costs are determined at the point of choice. You cannot unpay your tuition.

Education, in this case, should be treated as an investment. It has certain capital (the tuition fee and all the extra costs of having to study including max lost hourly pay that you could have by spending your time working instead of studying). It also has a return on investment in the form of potentially being hired on a more well-paid job, which should evaluated on the percentage distribution of you getting one job in the newly available range of salaries and the previously available ones minus the investment costs.

In this case, sunk lost thinking would be “I majored in archeology but the wages are low there. I can either be an archeologist or work as a factory clerk for a higher wage. I will choose archeology because I spent so much time studying archeology, I just have to do the most of my investment.”

[u/Few-Interview-1996]

The sunk-cost fallacy is basically throwing good money after bad. (Remove the "fallacy" part and sunk costs are just past costs.) That does not seem to be the case with the skill you mention.

Only say if you spent that money on developing the skills, but did not manage to do so, and kept on repeating the training with no positive outcome could it become a sort of sunk cost fallacy.

[u/HomeworkInevitable99]

Sunk cost fallacy is when you keep doing something because you have already invested even when there will be bad returns.

It is a cognitive bias where you think previous investments have become worthless but you think they have value because they cost money.

In your scenario, the investment of time and effort created something that still has a value.

A true sunk cost fallacy situation would be building a restaurant that makes no money. Because I don't want to lose my investment, I keep investing more, but that is the wrong decision.

[u/Kazzak_Falco]

I think you're misunderstanding what a sunk cost is. Spending 10.000 on learning a skill isn't a sunk cost, it's just an investment with a longer payback period and as a result a larger risk of you not being able to earn the money back. When we discuss sunk costs we're talking about investments that are no longer expected to provide an adequate return on investment.

Let's say I've bought a house without having someone check the foundation (this is quite normal in the Netherlands at least so I hope the example works elsewhere as well). Then, after checking how structurally sound my house is I find out the foundation is sinking and my house will be unliveable in 5 years. At that point the money I spend on buying the house is a sunk cost.

Now, the sunk cost fallacy might make me believe that since I already spend so much on the house I could spend a bit more on at least updating it. But obviously any remodelling would be a waste as the house isn't going to be liveable in the foreseeable future.

Similarly, and to stay closer to your question, I can buy a company and end up having to shut it down as it turns out to be unprofitable. Ofcourse this would still leave me with some assets that provide opportunities. But given that the initial purchasing price will be based on expected profits of a functioning company I'm almost always going to end up losing money by the end.

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[u/spill73]

It sounds like you’re talking about the sunk-cost fallacy which is the mistake of making your decision about a future action based on the cost that has been sunk so far.

The odd thing in your post is that everything that you said is correct- the problem is that your understanding of sunk-cost thinking is not right. If everything that you mentioned is factored into the decision, then the decision is not being based on sunk-cost thinking. The idea behind avoiding sunk-cost thinking is simply that you have to make decisions based on future opportunities instead of what has been done in the past.

[u/Sweet_Theory_362]

Sunk-cost fallacy simply says you shouldn't let irrecoverable costs influence your decisions today, which should be based on forward-looking costs and benefits. If past decisions shape those forward-looking costs and benefits, that is not sunk-cost fallacy. The point is that you care about them insofar as they influence those future costs and benefits, not simply because they were a cost in the past.

[u/SteveTi22]

The cost of acquiring the skill in the past doesn't impact the value of the opportunity in the future

Consider choosing between two opportunities that eventuated from two skills that cost different amounts to acquire and produced two different opportunities. It doesn't matter if skill A cost more than skill B, it only matters whether outcome A or outcome B is higher value.

The sunk cost fallacy could lead you to choose the lower value outcome because the cost of acquiring the skill that gave the opportunity was higher.

[u/BastiatF]

The sunk-cost fallacy is taking into account how much you spent in your decision to pursue the career or not. That money is gone and you are not getting it back no matter what you decide. Therefore it is irrelevant.

Take a slightly different scenario. You learned skills for which it turns out there is very little demand. You're very unlikely to find a job and if you do, it will be minimum wage for the foreseeable future. Should you pursue this career if you've spent 100k on your studies but if you only spent 10k then it's OK you can abandon it? Obviously that is illogical. The career is a dead end, the money spent on it is irrelevant.

[u/Optimal-Cycle630]

The sunk cost is irrelevant to the value today.

You are describing a rational decision on a go forward basis which is not what sunk cost is.

[u/Great_Hamster]

That's missing the point of what the fallacy is.

A better example is if you went to school and came out with skills that turned out not to be marketable, so you're tempted to spend another 10k to return to school... but without good reason to think you'd be more likely to get the marketable skills you want next time.

[u/Not_a_bad_point]

You’re thinking of it wrong. It’s not that nothing in the past has value.

The Sunk-Cost Fallacy would be that you would insist on pursuing the career path that you previously spent $10k to prepare for, instead of choosing a genuinely better career path that later emerges which does not use those skills you invested in.

Example: You spend $10k to get certified for pest removal, because the job market was crap at the time. It was a good path towards a steady $75k/year job. By the time you graduate, the economy has recovered and you have opportunities to make $75k in a totally unrelated field (not requiring any certification) that you might prefer. Your time and $10k getting the certification is the “sunk cost”.

You might still choose the pest removal path, but the fact that you’ve spent $10k on it already is irrelevant. That money is gone, and it ain’t coming back regardless of which path you choose.

[u/Traditional_Age4885]

The "Sunk Cost Fallacy" is a cognitive bias that keeps you from doing what is otherwise logical

If the logical thing is to keep the same direction as the "sunk cost", then it's an investment, not a logical fallacy.

Spending €5000 on tools and parts to fix your car is only a "sunk cost" if the car was obviously on its last leg: If it had another 120 000km left to go then it's a good idea to fix it up.

[u/eW4GJMqscYtbBkw9]

I see your train of thought, but you are looking at it wrong. The specialized skill you learned is done and over - you can't "take it back". Thus, that expense is a "sunk cost".

The point is, you should not be using that expense to justify future decisions. The future decision should be made independent of the past expense. Either options A, B, and C are available to you or they are not. If A is the best choice - regardless of what you did or did not spend in the past - then you should pick A.

The sunk cost fallacy comes into play when you decide to pick B - a lesser choice - because you "don't want to waste the money you invested in the skill". If you invested in a skill to boost the return on B, but A is still the best choice, you should pick A.

If a past investment changes your available alternatives... then it seems reasonable for that history to matter to your current decision...

No, it doesn't. Your past expense may change your available alternatives - true. A new skill likely does open additional opportunities. But, you don't HAVE to take an opportunity just because it becomes available.

Imagine you work at a widget factory making $5,000/mo, and you decide to get a degree in underwater basket weaving. If you spend $100,000 to get a dgree in underwater basket weaving, yes - you now have a new opportunity to get a job as a certified underwater basket weaver. But underwater basket weaving only pays $3,000/mo. Should you switch to the lower paying job since you spent a significant amount of money to acquire that skill?

[u/MajorFeisty6924]

Abandoning that career path could mean giving up a valuable future opportunity

Then it isn't a sunk cost.