Don’t Forget About Sunk Costs

green_dollar tree

2014-25-2014 – Okay. It was a bad year. Lost job. Illness and death in the family. Last kid is off to college and we’re alone. Friend dies. New job is remote and I’m feeling isolated. Then a friend has a crisis and needs a place to stay. With her family. So we say okay. It was the right thing to do, but enough already.

Economists have a term for this: sunk costs. And it’s not a good thing. Throwing good money after bad. And there’s a mode of analysis that has you determine the return on investment (ROI) of each additional dollar you spend compared to the expected return. Business people have their pet projects and keep on spending because of what they’ve already invested, not based on the ROI of future investment. It’s a bad thing to do. You have to ignore sunk costs.

If you’re an economist.

If I were an economist, I would have thrown my friends out. If I were an economist, I’d throw my kids out. Heck, while I’m at it, I’m throwing my wife out. Everyone I love. Because I don’t expect to receive anything in return from them. It’s the same for you. ROI is zero. And you shouldn’t feel sentimental about what you’ve invested in them. It’s just a loss. You should move on.

After due time, our friends moved out. Tuesday, they came back to help us decorate our Chrismukah tree. Inexplicably, I was happy to see them. One of their boys plays piano and he played us a few songs. My son Cal plays and he played us a few. I play (sort of) and I played a few.

A few of my favorites.

My favorite songs didn’t start as favorites. My favorite songs are songs that I learned to play at great cost. My friend’s son and my son can learn new songs fairly easily. It takes me forever. When I invest the time to learn a song, it becomes a favorite.

The song will never pay me back.

You might say, Steve, of course the song pays you back. You listen to it and are happy. But I listened to all sorts of songs, and even enjoy many of them, without investing anything in them other than the time it takes to listen. The return from a song I never practiced is the same as from a song I practiced.

These select few, the ones that I spent months or even years practicing—these are my favorites. Because of sunk costs.

My friends and family are like that. Zero expected return. Good for nothing. All I have are these sunk costs.

This morning, when I was out walking lefty I saw a box in the alley amidst a pile of discarded wrapping paper. The box was for a starter Yamaha guitar called “Gigmaker Deluxe.” (I am not kidding. It’s a “best seller” at Guitar Center.) I hate to be the bearer of bad news, but it is almost a certainty that the teen who received this gift will never have a gig playing a guitar. I bought a Yamaha guitar in the late sixties. It was a fine guitar and my son Nat now has it at college. I never had even a single gig. The parents should retrieve that box and exchange the Gigmaker for a Middle-Level-Manager Maker—Deluxe.

You have to be conscious of ROI, say the economists, and not get sentimental about sunk costs. An economist would say to get rid of them all. Friends, family, Gigmaker, everyone. And ROI is not just my middle name, it is the middle of my name (Froikin).

But I think I’m going to kick out the economist instead. I got to throw out somebody. It’s Christmas, after all. (Maybe I’ll wait until tomorrow and exchange the economist for a new sweater.)

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