1

Sunk costs are not costs

Last week, a designer friend of Youcaijun said in our group chat that he was very confused.

She has been working at this job for nearly three months now, and she will become a regular employee in more than a week. However, the salary given to her by this company is lower than the market level, and the workload is also very heavy.

In fact, less than a month after joining the company, she complained in the group that she had little money and many things to do and wanted to resign, but because of the persuasion of her immediate leadership, she has been putting it off until now.

If she chooses to become a full-time employee, she will accept this unsatisfactory job. If she chooses to resign, she said she will get better job opportunities and the work intensity is unlikely to be higher than it is now.

She was struggling with these three months.

At this time, another friend stood up and said that sunk costs are not costs.

It is impossible to come back in 3 months. The cost of not coming back is a sunk cost. It is meaningless to consider it. Look forward and see which choice brings you more benefits.

If you are very sure that you will find a more satisfactory job after resigning, it will be nothing even if you take another 3-month probationary period with the company.

She said she made irrational decisions last year because of sunk costs. At that time, she was in a hurry to find a house, so she paid a deposit of 500 yuan in a daze. However, when she formally signed the contract, she found that the neighbors were renovating and it was very noisy and the transportation was inconvenient.

If I don’t rent, the 500 yuan will be gone. If I rent, I am not very satisfied. She finally compromised on the 500 yuan deposit and rented a house, comforting herself that she would be able to accept it as time went by.

After living there for more than two months, I felt it was unbearable. In order to successfully sublet and get back the deposit, she waived nearly one month's rent for the next tenant, which cost more than 2,000 yuan.

She said that for the 500 yuan deposit, she lived in an unsatisfactory house for more than two months and lost more than 2,000 yuan.

The shortcomings of the house are that the more you look at it, the more unbearable it becomes, and the more you do the job with less money and more work, the more you complain. Instead of continuing to endure it, find a better option.

2

Sunk costs that are difficult to ignore

Sunk costs are those costs that have been paid and cannot be recovered. This cost can be money, time, energy or even emotions.

The nearly three months that the designer friend has paid and the 500 yuan deposit paid by another friend are all sunk costs. (Although the 500 yuan deposit is said to be refunded, it is actually used to pay the rent. Like the advance payment, it is actually not possible to get it back, it is just in a different name).

There is a tongue-twisting saying in economics, "Sunk costs are not costs." This means that if there is no way to recover the sunk cost, there is no need to consider it. See which option is more beneficial to you when ignoring the sunk cost, and choose which one.

The multiple-choice questions now placed in front of designer friends are "A. If you stay, you will soon be able to earn a salary as a regular employee, but the salary is not high and the workload is heavy.", "B. Changing jobs is a high probability. Get a better job opportunity, but get probationary salary for three months."

She should choose between A and B instead of worrying about how much overtime she has worked and how much effort she has put in in the past three months.

With our persuasion, she started looking for new opportunities while working.

This is a rational decision, but in practice it is difficult to ignore sunk costs.

Because we are more afraid of losing than looking forward to gaining.

There is an "endowment effect" in economics. We can understand that for the same person, the joy of picking up 100 yuan is often not as strong as the sadness of losing 100 yuan.

So we are afraid of losing. Even if we can get a better choice by giving up something, we are not necessarily willing to give it up.

Like that designer friend, if you give up the 3 months you have invested and change jobs, you will have a better chance. But the efforts that have been made are very meaningful and difficult to give up.

However, Youcaijun feels that anything that is helpful to us is not easy to do. Not only ignore sunk costs, but also don’t chase the rise and kill the fall, be careful of high-yield traps, etc.

Although these are difficult to do, we still have to overcome them.

3

Your real losses are more than you think

If we are too reluctant to bear "sunk costs", we will make irrational decisions.

And the price we have to pay for this is not only the unpleasantness this decision brings to us, but also the "opportunity cost".

Here a talented person will explain opportunity cost again. Life is often a multiple-choice question. If you choose A, you have to give up B, and the abandoned B is the opportunity cost you paid for choosing A. .

Sometimes, our real losses are much greater than we imagine.

For example, my designer friend, if she does not change jobs, not only will she have to endure a job with less money but more work, she will also lose the opportunity to get a better job.

A better job is her opportunity cost.

Because opportunity cost does not take anything directly from us, it is a very hidden cost, so it is often ignored.

Just like those who open their own stores, when calculating costs, they generally do not include the rent of the store because they are their own landlords.

This leads them to misjudge their own costs and profits. If a talented person opens his own store, he can earn 30,000 yuan a month because he does not have to pay rent. I think the income is not bad.

But if I rent out my store, I can collect 25,000 yuan in rent a month. This is my opportunity cost of using the store to open a store. Even if I don't do anything, I can earn 25,000 yuan, and I only earn 30,000 yuan after working hard for a month. In fact, my labor is only worth 5,000 yuan, so I might as well rent out the house and find another job.

From this example, we should know that although opportunity costs are hidden, they cannot be ignored.

When you obsess over sunk costs, look at your opportunity costs.

4

Sunk costs are everywhere

Youcaijun believes that sunk costs are very useful economic knowledge, because sunk costs are everywhere.

Youcaijun just mentioned the sunk costs in work and the sunk costs in renting. In fact, there are many more and the span is very wide.

In daily shopping, the model where you pay a deposit to enjoy discounts. If you don’t buy, the deposit will not be refunded. This is tying up customers with sunk costs. Even if they later feel that the product is not good and they don’t want it, many people will still choose to close the deal when they think of the deposit.

In a bad relationship, even if you find that the other person has many shortcomings, you will not be happy if you think about continuing. But when I think about the youth and love I have put in, I will still go on and not break up until I can't bear it anymore. In the process, I gave myself an unpleasant experience and delayed my search for a better partner.

In investment, sunk costs also affect investors.

Even if a talented classmate bought a stock some time ago, the performance has not been good since he bought it.

He originally bought that stock blindly, but in order to earn back the cost, he kept adding positions, trying to reduce costs by adding positions.

As a result, the average purchase cost decreased, but the money lost increased, and later the stock was cut and exited.

He also asked me, what is the difference between his doing this and us doing fund fixed investment? Aren’t they buying multiple times to reduce costs?

In fact, the difference is huge. .

First, when we make fixed investments, we must ensure that the funds we invest in are excellent funds. Only in this way can fixed investments be meaningful and we can get returns. However, we don’t even understand the stocks he buys.

If the fund we invest in is a very bad fund, there is no point in continuing such fixed investment. If you keep buying, you may be like him. The more you buy, the more you lose.

Therefore, a talented person recommends friends who do not know how to choose funds to choose broad-based index funds for fixed investment. It is not easy to make mistakes.

Second, our fixed investment cycle is relatively long, so that we can truly achieve the goal of evenly amortizing costs by buying in batches multiple times.

His losses further increased because he was reluctant to bear the "sunk costs" and decided not to bear the blame.

Investors must think clearly whether their persistence is to obtain better returns or because they are reluctant to bear "sunk costs". If you don’t take the right path at the beginning, the longer you go, the more wrong you will become.

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Written at the end

Sunk costs are everywhere and often affect our choices.

So when we are reluctant to give up what we have already paid, we must carefully distinguish whether it is worth giving up other options for sunk costs.