The “Sunk Cost Fallacy” Fallacy
The Swiss Army Knives
Have you ever met someone so talented that you thought they could do nearly anything? These people are truly the Swiss army knives of the labor market — they’re good at many things, but only do one or two of them. You probably know of enough examples of this that it hardly seems surprising: the 3-sport athlete from high school, the bookworm who could play the piano blindfolded, the serial entrepreneur.
Though it may not be surprising that these people usually wind up sticking to just one of their talents, it should be surprising. Consider that successful people tend to have more autonomy. Autonomy is a dimension, if not a definition of career success for many people. So why is it rare to exercise that autonomy by transitioning out of a fruitful career, even for those with great options?
The Retirement Conundrum
Consider a related question: why do many people become reluctant to retire after achieving financial security? This is almost the same as the topic question. Suppose that, instead of switching from one career to another, we’re currently interested in those whose new “careers” look more like Netflix and gardening.
If you frequent forums or message boards like r/FinancialIndependence, you’ll notice that this question isn’t just hypothetical. Even among people who work with the goal of never having to work again, it can be very difficult to cut ties with a fruitful career. In fact, therein lies the answer to this mystery: as your time becomes more valuable (which it does, later in most careers) the opportunity cost of taking time away from work is, effectively, more expensive. Even if you have the means to retire, the foregone income of a very lucrative career is a considerable cost. Economically speaking, an early retirement is expensive not just because of the cost to support oneself, but even more so because of foregone future income.
The Sunk Cost Fallacy
You’ve probably heard of this idea not to worry about sunk costs. For example, if an old car has had many expensive repairs, those repairs are a “sunk cost” when it comes time to consider whether to repair it again for an unrelated reason. A sunk cost is one which won’t add value going forward. If it seems like a burden to ignore a sunk cost, it’s usually for psychological reasons, rather than strictly logical. The “fallacy” in the so-called “sunk cost fallacy” is that a sunk cost feels like a foregone investment when it really isn’t — a sunk cost is spent and not coming back.
Logical decision makers may claim to be aware of the sunk cost fallacy, but I believe they may actually be hyper-aware. Consider, finally, a multi-talented person with career woes. They question whether it’s right to make a switch when it feels wrong to throw away their valuable experience for a new pursuit. They may diagnose their misgivings as attributable to a sunk cost, and it would be tempting to think as much. After all, the time they spent in their career isn’t coming back.
However, in this case the time is not sunk but rather invested. It would be fallacious* to call those years a sunk cost because they represent a very tangible foregone income in the future. Like the aspirational retiree, this person is experiencing a very rational conflict. This person ought to take great care not to dismiss their misgivings as irrational.
Wisdom in Perspective
This reasoning would have us believe that some combination of talent and security can surprisingly lead to fewer rational choices. This is not because other options become strictly less viable, but because the original choice becomes progressively more so, leaving the others less viable in relation.
I believe these observations are obvious in hindsight, but elusive without serious consideration. The sunk cost fallacy is one idea which I find dangerous, not because it’s invalid, but because it’s easy to overuse. Consequently, a tool for making logical decisions can be empowering to exactly the opposite effect.
*Hence, the sunk cost fallacy fallacy