Skip to main content

The Relevance of Sunk Cost and Opportunity Cost to Learning

When I grew up, my mother told me about this club. It was a ritzy club that had very exclusive, prestigious members. It was praised by the masses as something that everybody wanted to be in. Every day, she would encourage me to do everything I could to join. Fortunately, membership had a relatively low barrier of entry, but it required an ongoing activity. One that would be the death of me, but my mother assured me it was worth it.

The name of the club?


The Clean Plate Club.


Okay, so I was being somewhat facetious with that first paragraph, but it was true. My mom was adamant about me finishing my plate off at every meal because she hated waste. I can't really blame her, but it unfortunately had some seriously negative ramifications into my adult life. Namely, I still force myself to eat everything on my plate because I cannot see something go to waste. It doesn't matter if I'm about-to-burst full, I'll eat it anyway!

But is it really wasteful? I'm not so sure now when I think about the principles of sunk cost.

Let's talk about how sunk cost is relevant to this situation and, more importantly, its pertinence to learning. If you're unfamiliar with what sunk cost is, Investopedia provides a pretty good definition:

A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs (past costs) are excluded from future business decisions, because the cost will be the same regardless of the outcome of a decision.


Don't get trapped in the "money" bubble here. Sure, sunk cost is relevant to money, but it is equally relevant to other assets. In the case of my poor eating habits, there is a dollar amount associated to the cost of food. So from that perspective alone, yes, there is waste.

HOWEVER, what I have learned recently is that there is another cost to balance. One that doesn't involve dollars. Instead, it involves calories.


This is where opportunity cost comes into play. I also like Investopedia's definition for that:


An opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is therefore most relevant for two mutually exclusive events, whereby choosing one event, a person cannot choose the other.

In my eating scenario, there is an opportunity cost I have to make. Either I "save money" by not wasting food and get fat, or I choose to be okay with the fact that I am throwing away food to stay trim. I hate making these choices, but it's a necessity in life!

So how is this relevant to learning?

Much like my eating scenario, people are highly likely to continue forward with an education track if they have already "sunk" a lot of time and money into it. The problem with this is that they may not be analyzing the opportunity cost here.

For example, if a student is two years deep into a degree on underwater basket weaving, he or she may continue to press forward with it even if they realize it was an awful choice of major. Why? Because that student already spent that much time and money. It would be a waste to not continue!

But it's not actually a waste. In my food scenario, "wasting" food wasn't actually a waste because I was saving myself calories. Likewise, abandoning avenues of learning may not be a waste as it frees up your time to pursue worthwhile things.

I'm picking on undergraduate schools because that is more easy to demonstrate, but it doesn't have to be formal education. A few years back, I tried to get my CompTIA A+ certification, but when it became apparent that my career track wasn't heading toward helpdesk-like support, it didn't make sense for me to continue pursuing. I was out a $40 book and about 3 weeks of studying. If I had kept pushing forward, it would have taken me several more weeks of studying, and for what? A piece of paper that would have looked nice on my fridge.

Ask yourself: are you focusing your energy on learning a new skill because you are already "this far into it"? Is it worth continuing? It's a sunk cost. You're not going to get that time or money back. Your best bet may be to cut your losses and pursue something else.

Comments

Popular posts from this blog

Five Albums to Listen to This Autumn

There's no doubt in my mind that autumn is my favorite season. I love everything about it. Of course, there are the things like cooler weather and pumpkin-flavored treats, but it goes beyond that for me. Falling at the end of the year (pun not intended), autumn signals an end of sorts in a number of ways. The year is coming to a close, so I find it as a time of reflection. Nostalgia is a very appropriate word here. Anyway, music is something very important to me, and I purposefully don't latch onto a single genre of music since I since there is a time and place for everything. The fall is no exception, so I wanted to share five albums you should give a listen to this autumn. I'll even take it a step further and recommend a specific song from each album, too. Without further ado, let's get into it.

"Money Only Makes You More of Who You Are"

On Christmas Day of 2002, 55-year-old Jack Whittaker was lucky enough to pick the winning numbers of the Powerball, earning him a whopping $314.9 million, the largest ever lottery win at the time. Jack was already doing pretty well for himself as the president of a construction company, so this windfall had pretty much set Jack for life. Shortly after his win, Jack seemed to have his life on track. He donated a good chunk of money to philanthropic efforts. But this lifestyle wasn't to last. Things quickly took a turn for the worse. Foolish with his money, Jack carried around enormous sums of cash in briefcases just because. Because of his reputation of carrying around this cash, he was robbed multiple times. Jack also lost a ton of money literally gambling it away. And if that isn't bad, it gets worse. Jack's granddaughter, only 17 years old, was found dead (presumably murdered), wrapped in a tarp and dumped behind a van, reportedly with many drugs in her system....

Thinking Big

Steve Jobs is often cited as one of the greatest influencers in modern business, and rightfully so. He not only helped to establish one of the largest companies in the world but helped to resurrect that same company from almost certain death in the late 1990s. Time and time again, Jobs helped usher in a new idea via a new product that would ultimately revolutionize the industry again and again. Those familiar with the popular biography by Walter Isaacson will know that Jobs's sustained success had a lot to do with what people called a "reality distortion field". Under this "reality distortion field," Jobs had an almost magical influence to make people truly believe in anything Jobs had to say, regardless of how wacky it seemed at the time . Where some people looked at Jobs as insane because of this, history has proved in favor of Jobs with the success things like the original Macintosh, iPod, iPhone, and even the Pixar Animated Studios. So, what was it ...

Who Do You Think You Are?

Worldview.  Religion.  Outlook.  Passion. Whatever word you choose, we all have some sort of identity. Some people are able to put a finger on that more easily, labeling themselves as Christian or Muslim. Some have a general sense of who they are, noting that they promote family values and being a good person. And then there's another category of people altogether. These people may not admit it to themselves, but there is a particular person, object, or idea that drives their entire lives.  This last group makes me nervous, especially when a person's identity becomes wrapped up in their job.

The Problem with Hierarchical Hiring

I browse LinkedIn pretty often, and the category of things that appears most on that main feed are inspirational quotes by inspirational leaders. Folks like Richard Branson and Simon Sinek appear most often. More specifically, the quotes have a central theme to them: companies need to hire good people.  For example, one of the latest quotes I've seen on my feed include this one from Tina Fey: "In most cases being a good boss means hiring talented people and getting out of their way." That's a great sentiment, but is that really reinforced in reality?