NMSA

Leadership Blog Series: The Sunk Cost Fallacy

Welcome to our leadership blog series! This month, Karen Appel VP of Finance – discusses the financial and time management strategies to get the most out of our investments through medical school. Our currency as naturopathic medical students includes time, attention, and energy. Karen tells us a few tips and tricks to get the most out of them.

The Sunk Cost Fallacy

Have you ever bought a ticket to a concert that you did not attend?  Or paid for an entry into a 5k that you did not even run? How did that make you feel?  Were you able to move on with your life or did you dwell on your decision for wasting the money? Maybe you pondered it and thought, “I paid for it and therefore I’m going!” despite the fact that you felt sick or tired, someone just asked you on a date, or that dreamy mentorship opportunity finally came up.

If any of the previous scenarios resonated with you, and you felt guilty or obligated by money already spent, welcome to the “sunk cost fallacy.” Defined by Berk and Demarzo, sunk costs are unrecoverable costs (2011).  This term describes the tendency of people to be influenced by sunk costs where they continue to invest in a project because they have already invested a large amount and feel that by not continuing it, the prior investment will be wasted (Berk & Demarzo).  However, regardless of whether someone continues to invest or not, the money is already spent. The decision to continue to invest should be based on which decision would give the most benefit without taking into consideration the sunk costs. Either way, the money is gone.

As medical students we may not have a lot of money to worry about investing. Instead, time is our currency. The rigors of the naturopathic medical school education consistently require students to prioritize their time to accomplish what is most important to them. Have you fallen into the sunk cost fallacy with your time? I have heard several students say that they are going to attend a class because they paid tuition for it. “I paid for it, so you better believe I am not going to miss a class! I do not understand how other people can skip classes.” Many of these same students also describe how they do not feel they are getting anything from the class, they learn this subject better on their own, or they would rather be sleeping or at the gym, etc. Remember: the tuition is already paid. Whether you attend class or not, you are never getting that money back. The decision to sit in the class should be independent of the tuition paid. Going to class should be based on whether the benefits of being present for the class outweigh the benefits of spending your time doing something else. If the professor’s teaching style does not work for you, perhaps you are better off going through the material on your own. Otherwise, you may be spending two hours in class and two hours outside of class, which is double what you would have spent if you had studied on your own. If going to class stimulates you, and you do not have to study any outside of class, perhaps you are better off going to class. Whatever your decision is, be sure it is based on your future benefit and not on past costs. This is the only way to avoid the sunk cost fallacy.

Learning to work through the sunk cost fallacy now will benefit us later as doctors. As a future naturopathic clinic owner, I may experiment with having my own supplement and herbal dispensary or building out an IV bar. Both of these projects require a significant upfront financial investment. Every few months I will need to evaluate my financial position and determine if I want to continue offering  these options to my patients. Despite the initial investment costs, I will need to look forward and determine if these projects are going to bring in revenue or not. If they do, I will happily continue them. However, if it looks like they are just going to continue to cost me money without a profit, then I will have to discontinue them. I do not want to be pouring more money into a failing project just because my ego is embarrassed at the amount of money I already spent on all of the start up supplies. Because I want to be able to help my patients long-term, I need to make sure my financial decisions are sound, rational, and without bias. Awareness and understanding of the sunk cost fallacy is part of that decision making process.

In the span of your life, you will make many choices about how to spend your money, time, attention, and energy. Each of them will be a gamble in its own way–you never know how a decision will play out until it is made and you live it. As NMSA CFO, I am inviting you to use the principles of the sunk cost fallacy I have described to take control of your life and your choices. Let go of the things that are already done: the money spent, the time wasted–whatever has already been sunk–and reinvest in yourself and whatever truly benefits you. It is the only way to profit in the long run.

Author: Karen Appel, MBA

Karen is a third year naturopathic medical student at Bastyr University in Kenmore Washington. Before seeking a career in natural medicine, Karen served 14 years in the United States Coast Guard (USCG) including earning her BS in Electrical Engineering at the USCG Academy. Also while serving as an officer, she earned her MBA from the University of Washington Foster School of Business. She completed her military career as a Certified Public Accountant and Budget Officer for USCG operations in the Pacific Northwest.

Passionate about empowering people to take charge of their health, Karen also works as a Crossfit Level 1 trainer and nutrition counselor for her neighborhood gym. She has competed in local weightlifting events, practices yoga, and is a strong believer in the power of meditation.

To recharge Karen loves traveling to tropical destinations to soak up the sun and scuba dive. During shorter breaks, you can find her day hiking, cooking delicious meals, and raising a rambunctious kitten.

Resources:

Berk, J. B., & DeMarzo, P. M. (2011). Fundamentals of capital budgeting. In Corporate finance (2nd ed., p. 188). New York, NY: Pearson College Division.

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