Writing off past costs

An interesting and counter-cultural concept in cost accounting learned at business school is “sunk cost.” It holds that a cost already incurred, or sunk, is no longer material or even relevant for later decision making.

Thus, the cultural value of “sulit”( Get your money’s worth) goes against the concept of sunk cost. For example, the former induces a diner to eat more than he should at the buffet table. To pass up a dish that has already been paid for is considered a waste. The resulting binging can lead to heartburn and maybe even a fatal stroke. The perception of losing out from skipping dishes in a buffet persists even if eating more does not alter the already sunk cost.

In trying to win the favor of an object of desire, the suitor may treat her to expensive dinners or hard-to-get concert tickets, or spend money on gadgets. What if she meets and grows fond of a triathlete in training at her gym? The loser in this love triangle may continue to ratchet up spending to show up the gym rat as incapable of keeping her in the lifestyle she’s now used to.

The laws of attraction work differently from the principles of an auction where the highest bidder wins. There are times when net worth does not affect matters of the heart, and other regions farther south. Giving up shopping and paid vacations can seem like the right thing to do for the moment.

Does the still enamored reject continue to pursue his now absent interest (another accounting term) with single-mindedness? Is he to be undeterred by constant cancellations of wine-and-cheese dates? Or should he simply write off all previous expenses as sunk cost and simply move on.

Giving up the chase and stopping the financial bleeding may lead to greater happiness. It is not always a virtue to follow the maxim — if at first you don’t succeed, try and try again. This approach can be a waste of both money and energy. Better to say if at first you don’t succeed, just quit and find something else to do.

Many pursuits, including those for fame or political favors, rely on investments of time and money. These do not always work out well especially when it comes to dealing with experienced exploiters. ( They used to be called “gold diggers.”) And the Scrooge in us often totals the amounts already expended on a particular project and do a cost and benefit analysis.

It is of course crass to consider money at all in some relationships. Deciding one day to just give up an unproductive obsession ( like stamp collecting or mountain climbing) should not be limited to adding up past costs but also consider existing and future benefits. Past struggles and expenses may need to be written off and treated as sunk cost.

Sunk cost is expenditure written off but experience embraced and learned from.

Personal relationships that turn sour go through the process of trying to be rescued. Can the effort to save a doomed partnership, whether romantic or corporate, lead to even bigger losses moving forward? Isn’t it better to avoid grief and write off past mistakes as sunk cost and move to something more likely to succeed?

Cost accountants are seldom perceived as love gurus, but their principles need to be heeded. If their theory of cost and utility apply to money, can’t they also be employed on personal relationships? The relevant cost, the economist too will affirm, is “marginal cost” which is additional cost for producing the next item ( as opposed to cost already expended and averaged out). The only consideration then in continuing a fruitless task is the additional expense and pain that the next steps will entail.

Companies that continue to run unprofitable enterprises throwing in more good money after bad in the unrealistic hope of a turnaround will do well to read again the lessons of sunk cost. Expenses keep growing until the source of support is resolutely turned off.

The admonition to just move on after a crushing and expensive foray applies to businesses too. Life is short… and so is an investor’s patience.

There are times when net worth does not affect matters of the heart, and other regions farther south.