Seth Godin on How to Deal With Sunk Costs
How Sunk Costs Hold Us Back and Propel Us Forward
Seth Godin was on Shane Parrish’s “The Knowledge Project” podcast this week, where he discussed:
- What is a sunk cost?
- How/why do we rationalize sunk costs?
To understand sunk costs, he told two stories:
1/ How sunk costs hold us back.
2/ How sunk costs propel us forward.
Business schools preach “ignore sunk costs.”
What is a sunk cost?
Spent money or time which can’t be recovered. You made a decision in your past. In the future, you need to decide whether to accept the gift from your former self. We have a bias when making decisions that involve sunk costs.
A sunk cost is a gift from your former self. The question is, do you accept that gift?
How Sunk Costs Hold Us Back
I went to college with my parent’s financial support. I started working at a job in my field of study. After giving it a fair shot, I came to the conclusion I didn’t enjoy the work. I want to switch careers and try something more aligned with my interests. The thing is, my parents worked hard to help put me through school. I’m worried I will let them down.
Do I continue to work at a job I dread? Or do I disappoint my parents?
The sunk costs in this situation are:
- The time I spent at college.
- The effort I spent at college.
- The money my parents spent on my college.
The decision seems easy, but we have an emotional attachment to sunk costs. A degree is hard to earn, and my parents love me. The last thing I want to do is disappoint them.
As I progressed through college, I didn’t know I wasn’t going to like working in the field I was studying. My parents encouraged me on to study engineering. At 18, it was almost impossible for me to know what I wanted to do for the rest of my life.
Now that I’m working, I’ve been given new information. The latest information should inform my decision. Not the time or money that went into earning my degree. The time, money, and effort expended was a gift from my former self — I don’t have to accept the gift. What got me here today is part of my narrative. It shouldn’t be a part of my decision.
I have a decision to make based on today’s circumstances. I’m dramatizing how expensive it would be to give up on a sunk cost.
How long would my parents be disappointed, a day? Am I going to continue working in misery for years because of it? No, of course not.
How Sunk Costs propel us toward our goals and values.
Seth Godin has written his daily blog for 7,500 consecutive days.
Those blog posts are a sunk cost. It would be emotionally expensive for Seth to miss a blog post. His blog streak is a gift from his former self.
On days where he doesn’t feel creative, the sunk cost is enough to help him write the blog.
BUT
If he ever loses the joy in writing the blog, he should stop.
The reason sunk costs are so challenging is because we like being aligned with who we thought we were. We are always growing and changing. You’re not who you were yesterday. Re-evaluate who you are regularly. Establish new sunk costs for yourself to keep you going.
There are two sides to sunk costs.
On one side, the sunk cost fallacy can cause us to:
- stay in a bad relationship.
- stay in a career we dislike.
- only ever think or talk of making a change.
Accepting the status quo takes less effort and risk than shaking things up.
On the other hand, sunk costs can:
- help us stick with new habits.
- help make decisions with a clean slate.
- propel us to make a change in our lives.
How to approach sunk costs
You have to erase your past and evaluate who you are today.
- What are your interests?
- What are your strengths?
- What feels like play to you but looks like work to others?
With those answers, you can approach any problem with the present information to guide your decision. Don’t align with who you used to be. Think for yourself, don’t let other people’s impressions of you guide your choices
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