The “I Might As Well” Trap – Confusing Sunk Costs, Incremental Costs and Opportunity Costs

This is part [part not set] of 4 in the series Dream Traps – What’s Stopping You?

If you’re a fairly easy-going person, chances are you’ve used the phrase “Oh, I might as well” before. Once or twice usually isn’t a problem. It becomes a problem when once or twice turns into every so often which inevitably becomes every time. “I might as well” is probably one of the reasons why I’m still in audit.

We say “I might as well” for a lot of reasons, but mainly because:

  • We think it won’t take a lot of additional time or effort, OR
  • We lack direction and don’t really know what we should/want to do
  • We can’t bear the thought of throwing in the towel after spending X amount of time and Y amount of money already on something (because that would be like failing)

Most people who have studied economics would be aware of the terms “sunk costs” and “incremental costs”.

“Sunk costs” are those costs which have already been incurred and no matter what you do, you can’t change that and get your money back. In accounting and finance, when we learn about what information to include in a decision-making models, we exclude “sunk costs” since no matter what is decided, those costs cannot be recovered and therefore shouldn’t affect the decision one way or another. It’s easy to condemn bad decision making when it’s presented in textbook format but it’s very hard to acknowledge it when it comes to sunk costs in your own life. In other words, you’ve already invested time and resources into your situation, so you “might as well” go through with it to the fullest extent.

“Incremental costs” are those additional costs which you will incur in order to do XYZ. You can avoid incremental costs by deciding not to go through with XYZ as they are future costs which you haven’t committed to yet. If you’ve committed yourself to those costs and you can’t do anything about it, they become sunk costs.

Mistake #1: Failing To Consider Incremental Costs When Deciding What To Do

When I was selecting my subjects in high school, I had no idea what I wanted to do. I hedged my bets and took mainstream subjects which were supposed to give me a higher UAI score. Lo and behold, before I even realised it, 8 out of the 10 minimum units were taken up by 2 subjects, 1 of them maths. I don’t even like maths!

According to the Board of Studies NSW, each unit of study requires 60 hours of classroom study per year. I ended up wasting a lot of time.

That’s 18 hours of class that could have been spent on more relevant subjects that would have helped considerably and that I enjoy:

  • Drama – I could have learned about dramatic structures and techniques
  • Design & Technology – I could have learned about set design
  • Textiles – I could have learned how to design and make costumes

Or 18 hours that I could have spent on extracurricular activities like:

  • Joining a local musical society
  • Staying involved in choral activities in high school and producing the third instalment of “A Night On Broadway”
  • Trying to write a high school musical like so many great Broadway composers (side note: apparently it would help tremendously if I were also male and named “Stephen”; maybe I should change my name to “Stephanie”)

None of these were sunk costs when I was selecting subjects. They were all incremental costs that I should have thought about when I was making my decisions.

Mistake #2: Considering Sunk Costs When You Shouldn’t

I am still stuck in the “I Might As Well” trap today. You would think after coming to the realisation that I didn’t want to be in accounting I would have stopped right then and there and figured out what I could do with my life. Instead, I thought “I have a steady job so I might as well go back to work while I figure out what I want to do.” I then thought “I might as well start my CA while I’m here.”

2 years comprising of 500 hours of study and about $10,000 later (5 modules at approximately $1,200 tuition fees plus $600 in study support), I’m now in the middle of studying for my final EBA exam and my care factor is non-existent.

After every module, I would kick myself. What was I doing, continually racking up these study costs? But I couldn’t stop, not only because that would be admitting failure but because it seemed like such a waste of my undergraduate degree and my entire internship. It also seemed like a tremendous waste of the modules I had completed to date, especially after I had completed the FIN and TAX modules, since they were perceived as the “hardest” and by then I was halfway through my technical modules.

What could I have done with 500 hours and $10,000?

I continually kept thinking about the costs of my degree, my internship and the modules I had done to date. These costs would only be relevant if I am going to continue to pursue a degree in business. But the moment I decided I’m going to pursue my dreams of music, these costs became irrelevant; they were sunk costs. I would have been much better off disregarding the CA altogether.

The Root Cause: Forgetting The Opportunity Costs

We all know we should weigh the pros and cons of each decision, but most of us are pretty terrible at it since humans are naturally both loss adverse and risk adverse, “a bird in the hand is better than two in the bush” and all. Thus we always tend to choose the safe option of what we know, rather than chasing the uncertain dream. But we forget that in doing so we tend to overvalue what we have.

“I Might As Well” Is Not Good Enough

It’s really easy to just go through the motions every day, forget why we’re doing things and just go along with the flow because you “might as well”. But a day becomes a week which becomes a month and before you know it years have gone by and all you’ve done is live life by going through the motions.

I look back at my life for the past two years and I can count up the total number of meaningful things I’ve done that really mattered to me on a “this is my reason for living” level on my two hands. Assuming each meaningful thing takes an average of 1 day, that’s at least 355 days out of the year on which I am not doing a single, meaningful thing.

That’s a pretty miserable way to live life. It’s not life at all, it’s a waste of a life. I think Jonathan Larson summed it up best in these lines:

One Song Glory

From the pretty boy front Man
Who wasted opportunity

Every time I hear Adam Pascal sing those words I get a chill.

Some people might be lucky enough or focused enough or self aware enough to be doing meaningful things every single day of their lives.

Another Day

There is no future
There is no past
I live this moment as my last
There’s only us
There’s only this
Forget regret
Or life is yours to miss
No other road
No other way
No day but today

The rest of us are generally too afraid or too complacent. We lose sight of the big picture and get stuck worrying about these sunk costs. Or we get caught up and forget to consider incremental costs. And so we end up with a really big bill in opportunity costs.

I don’t want to keep putting off living life to “another day”. There’s “no day but today“.

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