Saturday, September 26, 2020

Advantages of having no sunk costs


The Psychology of Money had a really good story on Daniel Kahneman. Kahneman was an amazing author, he could submit one draft chapter for review and then submit a completely different rewrite that is basically a totally different work with different references and footnotes.

This requires a high level of productivity but it also requires that an author discard previous work with little or no regret. When Kahneman was asked how does he do this, he replied that he does not believe in sunk costs.

I felt this lesson resonated a lot with me because the opportunity cost of going through law school is about $70,000 in fees and at least $480,000 in lost income. Being in an unlucky batch that struggled to get training contracts made things much worse. If I insisted on doing legal work, it would mean half the pay I was earning prior to law school for 50% more effort.

So when presented with an opportunity that pays significantly more with perhaps a third of the time investment, it was logically a no-brainer. So far, I am pretty on point in replaying my opportunity cost.

But that creates a problem in Asian society. 

For reasons unknown, people are welded to ideas that folks should do what they learn in school. In every funeral wake or wedding I attended, people ask me why I am not a lawyer. I think becoming an investment trainer make things worse. Some trainer who taught derivatives and options in the 1990s got into some legal trouble and tarred the profession. 

( Ironically, I am very familiar with the case law behind that. I'm also not getting a Phd to impress my students anytime soon.)

I count myself lucky as I only spend a fraction of my dividends and wear it like a suit of magical armor. 

What relatives think about my career choices is their fucking problem. The growth of my wallet matters more than playing dress-up and looking good at the outside while actually getting a dressing down in the courts.

But not everybody can buy self-esteemed with dividend pay-outs. ( I suspect without my investments, I'd probably be as insecure and neurotic as many legal professionals in Singapore. Hence the Italian cars, broken families, and high blood pressure. )

So reframing life decisions as a decision about sunk costs is a useful psychological tool.

You cannot recover sunk costs. Your decision tree should only evaluate future options and future attractiveness of available choices.

Say, you are an engineer and you get a job approving mortgages in a bank. The time and effort you put into engineering school do not matter if your mortgage role is the best career decision moving forward. In the CECA outsourcing era in the 2000s, wasting an engineering degree was the right career move for that generation of unfortunate technology professionals. We needed the MRT breakdowns to demonstrate the policy failure of shafting the Engineering profession.

Still, I can imagine worse applications of this principle. 

If you have been dating for a decade and see the relationship unfolding as a boring and loveless one, accept that the sunk cost is high and move on towards a better relationship, don't make a divorce lawyer any wealthier by getting married. 

The only problem with the concept of sunk costs is that it can't really be explained to laymen very well. 

I still need a good justification to explain my career choices, I will just say that if the legal sector picks up, I may rejoin at a later stage if it becomes ever profitable again.  


1 comment:

  1. Hi Chris,

    Totally agree with your analogy. My bachelor degree through part-time is in a marketing aspect. However, the full-time employment which I was last in May 2018, was not related to the marketing. It is just the matter of timing and opportunity at the prevailing point of time.

    A lot of my friends do not understand the rationale of me leaving the full-time employment and claims that it is a waste of so-called investment in bachelor degree in which I cam milk more remuneration by staying on for the few more years. The so-called sunken cost of the diploma and advanced diploma (from local polytechnic) and bachelor (through distance learning) is about $24K. I believe that I have milked more than sufficient proceeds (from 2004 to 2019) from the sunken cost. Yet, my friends opine that more milking can be made by staying for a few years more. To me, it is akin to one more years snydrome. It makes sense to move on for personal interest. Life is short and it is more worthwhile for me to move on and do things of my liking.

    My two cents worth of views.