Some minds just are not meant to understand economics. Mine is one of them. Despite the fact that it was not required, I tried an econ course in college – and quickly dropped it in favor of yet another lit class. Macro, micro, whatever. I get the concept of supply and demand, but for the most part, my brain just isn’t wired that way.
Then along came Freakonomics. And I realized that sometimes it’s not the topic, but the presentation; it’s not the subject, but the instructor. Now I’m seeing economics – social economics – in a whole new light.
I listen to Freakonomics Radio on Sundays, and I often find myself in those “driveway moments,” where I’ve reached my destination, but I can’t turn off the program. One recent grocery trip was delayed so that I could listen to the repeat of a program I’d missed several years ago: “The Upside of Quitting.” And it couldn’t have come at a better time.
There’s an art class I’m taking at the local community college, and although I’ve taken it several times before – and have loved every minute – for some reason, this time around I’m just not into it. I’ve invested in the tools; I’ve invested in the course fees; I’ve invested my evenings (and some weekends). And I’d like to quit, but I can’t bring myself to do it, despite the fact that I just can’t muster the enthusiasm anymore. The class is not a requirement; it’s supposed to be relaxing and fun. This time around, it’s neither.
Enter the economic concepts of “sunk cost” and “opportunity cost.” As I learned from my radio friends, sunk cost is all about the past. It entails all the resources you’ve “sunk” into a project or job or relationship – time, money, energy, sweat equity, even emotion – and all of that expense makes it difficult to leave, no matter the situation. You may find you’re in a position of diminishing returns, but because you’ve sunk so much of yourself into it, you’re reluctant to let go.
Then consider “opportunity cost,” which is all about the future. Essentially, opportunity cost is what you may be missing – the possibility of something better, something more fulfilling – because you’re stuck in a rut. For every hour or every dollar (or every bit of thought or emotion) that you spend on one thing, you’re giving up the opportunity to “spend” those resources on doing something else. And that something else may very well make your life better. Or easier. Or simply release you from the doldrums in which you’re mired.
If you can weigh the two – sunk cost vs. opportunity cost – and determine which has more potential to improve your life, it’s supposed to be easier to make a decision. A bold decision, and in some cases a life-changing decision. And then to act.
Say you’re used to performing part of your job in a particular way; you do so because that’s how you were trained, or taught, or simply because it’s always been done that way. Deep down, however, you know there’s a better way to do it. That better way is sort of an unknown, and the unknown can be a little scary. But you know your job well enough to know how to improve it, so when do you “quit” the old way and implement the new? When do you decide it’s okay to leave behind that on which you’ve spent so much of your resources?
Maybe it’s when you realize that those resources weren’t spent in vain, that they truly did not go to waste. They didn’t necessarily “purchase” exactly what was needed, or wanted, or expected. But they helped you to develop an understanding of where you are and how to make things better.
Can your experience be considered part of the sunk cost? I think so. And I don’t think that sunk costs need always be negative. That is, unless they paralyze you, unless they prevent you from making progress. If you’re sticking with something that’s not working only because you’ve poured resources into it, and if those resources are not generating positive returns, then isn’t it time to move on? If you’re producing a particular plant because you’ve always produced that particular plant, and that particular plant no longer is the plant of choice at the consumer level, isn’t it time to propagate something else?
Considering sunk cost and opportunity cost, the upside of quitting is not giving up, but acknowledging the value of the sunk cost and applying that to something new.
So, is it time to quit throwing pots? Maybe.