Have you ever gone through a series of phone messages that finally take you to the department you need? Then, after 5 minutes, 10 minutes, 15, no one picks up and you start to wonder if you should hang up.
Deciding what to do, most of us focus how long we have waited. Called our sunk costs, what we have “spent” in time and aggravation up to this point shapes our decision. We think, “I have waited this long so I should remain a bit longer.”
Sadly though, we are ignoring the opportunity cost, the sacrificed alternative. Maybe, because hanging up frees us to do an important task, as an alternative to remaining on the phone, it has more benefits..
The key here is not to base a decision on how much the past cost you–on your sunk costs. Instead, use future benefits to make that decision.
In a recent podcast, Freakonomics guru Stephen Dubner said quitting was all about sunk cost and opportunity cost. Do take a look at the JOLTs data below. It appears to confirm his explanation.
A part of the JOLTs (Jobs Openings and Labor Turnover) data, the quitting numbers tell us the volume of voluntary job leavers. You can see that during the recession, the quit rate plummeted. At that time, jobholders contemplating leaving might have decided to stay because they had invested considerable time into their position (sunk cost) and also because the benefit of quitting (the opportunity cost) would not have been another job. With sunk cost and opportunity cost analysis converging, fewer people quit. Now though, the quit rate is starting to climb. Now sunk cost and opportunity cost each would lead you down a different path.
Our bottom line? Whether deciding about a phone queue, leaving a job or selling stock and breaking up a relationship, whatever the decision, if sunk costs are a consideration, be sure to think about the benefits of the opportunity cost also.
Please do share examples of sunk costs in a comment. It would be interesting to create a list.
One Reason to Quit A Job
Elaine Schwartz
Elaine Schwartz has spent her career sharing the interesting side of economics. At the Kent Place School in Summit, NJ, she has been honored through an Endowed Chair in Economics and the History Department chairmanship. At the same time, she developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 ½ (Avon Books/Harper Collins). Elaine has also written in the Encyclopedia of New Jersey (Rutgers University Press) and was a featured teacher in the Annenberg/CPB video project “The Economics Classroom.” Beyond the classroom, she has presented Econ 101 ½ talks and led workshops for the Foundation for Teaching Economics, the National Council on Economic Education and for the Concord Coalition.
