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Sunk Cost Fallacy when Changing Career

2020-04-16 - Arne Jenssen

In 1965 the UK and France started the construction of the Concorde. The first and only commercial supersonic passenger airplane. Already before the first flight in 1969, they knew that the Concorde would never be profitable. But they didn’t scrap the project and write off the loss. There was too much money already invested and huge prestige was at stake. Instead they ran the Concorde for decades until it was finally retired in 2003, incurring a much larger loss.

The “Concorde effect” is the inability or unwillingness to stop a doomed project because too much has already been invested. This cognitive bias is also known as the sunk cost fallacy.

I have been guilty of it myself.

I spent four and a half years becoming a PhD in a field that wasn’t my primary interest. Sure, there were many intellectual challenges that triggered me, but in my free time I was reading books about software development and business. My reading habits gave me doubts. But I had already spent so much time studying this field, it felt like a shame to waste it, and quitting was not really an option. I must finish what I had started. I could always quit later. This was my destiny - or so I thought.

Many amateur stock investors sell stocks that are performing well because they want to take a profit, and they keep stocks that are performing badly because they don’t want to incur a loss. They mistakenly use the purchasing price as a decision factor. What you paid for a stock is irrelevant to your present decision about a stock. You need only one rule to decide about an investment. The only thing that matters for an investment is the future. Do you believe that the stock will appreciate or depreciate?

If this is true for investing in stocks, wouldn’t it be true for other investments you make in life?

It took me two more years after completing my PhD to finally take the leap and resign from my job as a researcher to go full time on programming in my own company. You’d imagine that it would be painful. That it felt like all the years of study were wasted. Indeed it wasn’t with a light heart. But I sunk the cost. I cut the further losses. Since then, 10 years have gone, and now I think it was the best decision of my life.

I see education and career as an investment subject to similar considerations like a stock investment.

Conditions change all the time. Why let a decision that we take fresh out of high-school be a shadow over your present and future life? We know much more now, than at our start of education. Does it matter how many years and how much money we spent on education? It is a sunk cost. There is nothing we can do about the past. What matters is the future. Do you see an outlook for thriving in your field for the remainder of your career, or do you dream of another direction?

A year later, as a freshly minted web developer, I had worked hard to master programming with a software framework called Django. I count almost 20 books on my shelf about the subject. One day my brother in-law told me about node.js and SPA (Single Page Application). I realized that this was a much better approach to web-development. A few days later, I scrapped everything I’ve worked on the last year. I don’t remember feeling the pain of sinking that cost. There is no use in crying over spilt milk. I guess I must have been too excited about the new way forward.

The world is changing so fast that it feels like drinking from a firehose just to keep up with the latest changes. The only thing that is certain is that things will change. The Stoics say - we can't control what happens, but we can control how we respond. Change will happen again, and sinking cost is a response we have to get used to. Most people simply cannot expect to have only one career.

In 1985 Andy Groove and Gordon Moore (ref. Moore's law) at Intel Corporation were facing a difficult situation. Their company’s primary business was to manufacture memory (DRAM) chips for computers. They had $400 M invested in production capacity. But the strong competition from Japan caused the DRAM prices to drop below production cost. This threatened the foundations of Intel. They looked at every option for staying in the memory business to no avail. One day Gordon asked Andy - “If you came from the outside to run Intel, would you invest in the DRAM business?”. Then it was clear that they had to overcome the emotional commitment to the market that had originally made Intel a successful company.

This technique of creating a distance from the decision can be helpful when facing sunk cost. Asking what somebody else in your situation would do.

According to Inc-magazine, almost half of all employees in the US are dissatisfied with their job. Since the job is a big part of life, and you have only one life, you owe it to yourself to seek the most fulfilling way forward. You may owe a lot to your employer, but not your life and happiness. For them it is business. For you it is your life.

I am not saying that everybody should quit their jobs. Persistence is a virtue. Up to a point. Seth Godin writes in his book “The Dip” that we need to know when to quit and when to persist. Often the experience of hopelessness is just a temporary dip. If we manage to push through the dip we can come out stronger. Knowing when to quit and when to persist is more an art than a science.

Some questions to ask yourself.

  • What do you like to read about?
  • What can you do to increase autonomy, mastery and purpose?
  • Who are you envious of?
  • How would you like to grow as a person and what skills do you wish you had?
  • What would you study if you were 18 years old again?
  • In what area are you able and have a desire to make a difference?
  • What would you do if salary and status were not important?

To conclude, in the prospect of reinventing yourself, switching education, starting a career, or ending a relationship - there are many things you should consider, but what you “paid” for it should not be one of them.

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