Last month I wrote about the sunk-cost fallacy, the mistaken belief that just becuase you’ve spent money on something you should continue to spend money on it.
In reality, once you’ve spent your money, it’s gone. According to economists and psychologists, it’s a mistake to consider past expenses in deciding what to do with your investments, your home, or your Stuff. What’s important are future expenses and future happiness. To the extent that we can focus on the future instead of the past, the better off we’ll be financially (and mentally).
The example I used in that article was my desire to continue playing a computer game because I’d already pre-paid $80 for six months of service. Unfortunately, the example failed because people took me to mean that it was a “waste of money”, which wasn’t really what I meant.
Today I want to offer another real-life example. Maybe it’ll do a better job of conveying the concept of the sunk-cost fallacy.
Last March, I decided to tackle my physical fitness by setting some big goals for myself. One of those was to go from couch-potato to marathon runner in about six months. To goad myself into action, I paid about $100 (non-refundable, non-transferable) to sign up for the Portland Marathon (which is being run at this very moment).
For a while, this seemed like a brilliant idea. Having paid for the marathon in advance, I was motivated to train so that my money didn’t go to waste. I began to run with a group. I lost weight. I felt great.
At the end of May, however, I hurt myself. I took some time off. I didn’t worry too much, because there were still four months left before the marathon. But when I tried to return to running, the pain persisted. I went to see a physical therapist. June turned to July turned to August. Eventually I decided that maybe I could walk the marathon. I’d paid $100 for it, dammit, and I wasn’t going to let that money go to waste!
Over the last couple months, however, I’ve come to realize that I’m engaging in the sunk-cost fallacy again. The fact that I’ve already spent $100 for the marathon is meaningless. It’s a sunk cost. It’s not recoverable. What matters is the future cost in time and money. And, as it turns out, health.
I could have continued to push myself to prepare for the marathon, but the most likely result would have been additional doctor bills and physical therapy visits. I would be spending future money attempting to make past money “good” again.
Instead, I’ve changed my focus.
I’ve begun to prepare for the 2009 Portland Marathon. I’m running short distances (three miles) a couple times a week. I’m lifting weights to build my leg strength. Meanwhile, I’ve learned a lesson. In the future, I won’t sign up for the marathon until later in the summer, when I’m sure that I’m physically ready to go.