Never mind the cost

Never mind the cost


Epictetus was an ancient Roman philosopher who promoted the philosophy of stoicism — “It’s not what happens to you, but how you react to it that matters.” Disasters do happen, we just need to manage how we react to them. What about how much they cost? Sometimes that too needs to be set aside.

Our cultural values urge us to get stuck and keep looking back…at our roots, our social obligations (utang na loob) and, yes, the costly disasters in our past.

We can learn to cope with cost accounting concepts learned at business school, like “sunk cost.” This approach 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” (getting your money’s worth) goes against the concept of sunk cost. The former induces a diner to eat more than he should at the “all you can eat” buffet table for a fixed price. To pass up a dish that has already been paid for is considered wasteful. Why skip the dessert table or the appetizers even when one is already dizzy? (Get a new plate.) This binging can lead to shortness of breath, and maybe even a stroke. The feeling of losing out from skipping dishes at a buffet persists even if eating more does not alter the already sunk cost of the meal.

In trying to win the favor of an object of desire, the earnest suitor may treat her to expensive dinners, the latest gadgets, and other lavish gifts. What if she instead grows fond of a triathlete in training at her gym? (Sure, he has a lower net worth, but those abs are something else.)

Is the persistent suitor to be undeterred by constant cancellations of wine-and-cheese dates on a yacht? Or should he simply write off all previous expenses as sunk cost and just read Tolstoy’s Anna Karenina?

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 persistent approach can lead to additional waste of money and energy. Better to say: “If at first you don’t succeed… try something else.”

Many pursuits, including running for office, rely on investments of time, money, and emotion. Maybe different rules apply in politics. Clearly, the theory of sunk cost does not apply to those who “double up” after losing the first few rounds at the casino.

It’s not just sunk cost that weighs on the decision to change course and move on. Staying in a losing situation means that other options are given up. Again, the cost accountant weighs in with the related concept of “opportunity cost.” This is the cost of not profiting from another investment that is given up.

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 costs and move to something more likely to succeed… like collecting art?

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 applied to personal relationships? The relevant cost, the economist too will affirm, is “marginal cost” which is the 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 understand the concept of sunk cost.

The admonition to just move on after a crushing and expensive foray applies to most things in life. Sunk cost should be written off but the experience from it is embraced and learned from… if they still matter.

Tony Samson is chairman and CEO of TOUCH xda