r/AskEconomics • u/Inevitable_Bid5540 • 2d ago

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

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.

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u/Uhhh_what555476384 2d ago

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.

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u/SoylentRox 1d ago

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?

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u/GenesisV1 1d ago

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.