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As we’ve become more mindful of our money we have also learned how the sunk cost fallacy can be a challenge to deal with. The sunk cost fallacy is the dilemma of worrying that our spent money would go to waste when a change in circumstance occurs. According to Christopher Olivola, an assistant professor of marketing at the Tepper School of Business at Carnegie Mellon University, “The sunk cost effect is the general tendency for people to continue an endeavor, or continue consuming or pursuing an option, if they’ve invested time or money or some resource in it… That effect becomes a fallacy if it’s pushing you to do things that are making you unhappy or worse off.” The sunk cost fallacy is an attempt to fix the mental and emotional disconnect between paying for something and then not being able to enjoy it.
At this point in our lives, Ali and I mainly struggle with the sunk cost fallacy as unexpected opportunities arise that conflict with travel plans we have already paid for. We keep an eye out and try to plan for those unplanned situations as much as we can. Traveling full time might sound like a life that’s all rainbows and good times. But, even if things are perfect sometimes we just want to change plans and ignore the rainbows outside, because we need a day or two to be lazy and just read or sleep.
One of our biggest goals as full-time nomads is to be very mindful of our budget and frugal to a degree. But for us it’s also important to be willing to move forward, let go of money spent when that’s the right choice for our health and happiness, and then make the next best decision we can.
The Sunk Cost Fallacy at Home – What’s in Your Garage?
Back when we were still career-focused homeowners we really struggled with the sunk cost fallacy. There were many things we bought or spent money on when we lived in Seattle that we had trouble letting go of, even when it was obvious that we were wasting money by keeping them. Those types of purchases are things that lots of folks have in common. Think of unused gym memberships, bikes, cars, vacation homes, time share investments, or even stock investments that didn’t perform as planned and then lost money.
In all cases, holding onto these so called investments that you are no longer using and getting value out of or getting a return from, should be given away or sold even at a loss. If the money you put towards these items is not producing a good return for you, acknowledge it and make a change.
At one point we owned 2 houses that were both losing money as rentals, while also continuing to require expensive maintenance. And one of those also had a basement full of furniture and tools that we weren’t using. Those were homes that became rental properties based on our emotional need to keep them. They are great examples of our struggles with the sunk cost fallacy. We learned a ton from those situations, and we hope not to need to learn those lessons again.
Sentimental value is a big component of the sunk cost fallacy. When we finally figured out that things won’t always give us the same joy down the road as in the moment we had the exhilaration of buying them, we stopped making those types of emotional purchases. Our rental property lessons helped us decide to sell our condo, downsize to the 5×10 storage unit we currently have in Seattle, and become full-time nomads. Now we live out of two 22” suitcases and two backpacks. And we stopped making new purchases that we can’t experience, eat, wear, or carry as we go.
Today sitting in a little Airbnb in Japan we have learned that we don’t miss what’s in our little storage unit much. We talk about the possibility of a time in the relatively near future when we might have a little home again somewhere. We believe we would appreciate having our favorite dishes, which are partly gifts from Ali’s grandmother and my mother, and the art that we’ve collected, and the awesome KitchenAid we got as a wedding gift with all of the fabulous attachments we bought for it. For now we don’t need any of those things and that feels great. We also talk about the possibility of deciding we are ready to let those things go and giving up that little storage unit. We shall see!
The Sunk Cost Fallacy in Travel
We try to balance making the best of a bad situation on the road with making good money choices. That’s one of the travel skills that has really evolved for us over time. We’ve had very few big travel challenges in the years we’ve been traveling. But there are three sunk cost fallacy lessons that stand out.
I was at work finishing the day so we could leave on vacation the following morning. One of my coworkers got a call from her daycare saying she had to go pick up her cute kid because he was sick. So she went and got him, and brought him back to work for a little bit while she wrapped some things up. When they came in the door and the little guy was crying, I immediately took him and held him for a while. The poor kid was hot from his fever and clearly very uncomfortable.
The next morning Ali and I got in the car with my parents and drove to the Oakland airport so they could visit with my sister in the East Bay and we could fly on to Vegas. That’s when I found out I had contracted the norovirus from that cute little kid. Instead of flying to Vegas I spent the next 2 days on the bathroom floor in an airport hotel. That virus cost us the fun weekend we had already booked and paid for at the Grand Canyon, with lost reservations at hotels in 2 locations. Plus the added costs from sitting in that Oakland airport hotel for 2 days.
We did get on a plane after those 2 days of hell and I made it to the rest of our planned trip which was a Photoshop conference in Vegas that my company had paid for. But the Grand Canyon is what we were most excited about. And though we made it to Vegas for a few days I still wasn’t feeling well or able to eat much, so we weren’t able to enjoy ourselves as we had planned.
The Vegas TRIP Lesson
The more time and money we invest in our decisions the harder it is for us and most folks to change course. When I got sick the day we meant to fly to Vegas, should I have sucked it up and gotten us on the plane anyway? When things like this happen, how much weight do you give the fact that money has already been spent in your decision making process? Some might say, you don’t want that money to go to waste. That’s one way to look at it. But really, the most important question for us is to ask what would be the best way to take care of ourselves in that moment.
In that Vegas trip situation I was so sick I really couldn’t get on the plane no matter how much money we had already spent. And anyway it would have been awful to keep spreading the norovirus to a plane full of people. The Grand Canyon wasn’t going anywhere and the conference hadn’t started yet. So salvaging half of that trip ended up being the best option. One could say that’s why travel insurance exists but that’s for another post.
We were at the Seattle airport ready to board our flight to Paris, and then the airline announced our plane was having mechanical issues and there would be a 4 hour delay. We had thought by planning a cushy 3.5 hour layover in Iceland we would be safe, but the delayed flight from Seattle to Iceland caused us to miss the next flight from Iceland to Paris. So we made it to Iceland where we had an 18 hour delay to deal with. When we finally made it to Paris we picked up our rental car a day late and lost a hotel night we had paid for. All in all we probably got off easy by only losing one day in Paris plus the cost of one hotel night and one day of our car rental, since we had prepaid for those things to get a killer deal.
The Paris Trip Lesson
When we arrived in Iceland 4 hours late, the airline staff was ready for us and they processed the entire group of passengers quickly. Everyone who was continuing on to Paris with us and sharing the 18 hour layover, which ended up being the vast majority of the passengers on our plane, was offered a night in a hotel that was a 2 hour bus ride away. And everyone agreed with that plan, except for us. While we were in line with people who were being given apologies for uncontrollable circumstances and explanation of the importance of safety, bonus miles, and free hotel rooms with meals included, our fellow passengers were acting like ugly Americans. They were complaining and being very rude, and we just wanted to separate ourselves from them. We couldn’t control much in that situation, just ourselves and our behavior during the delay.
In this situation, we made the best of missing the start of our vacation by evaluating our options and picking the solution that worked best for us. And that meant not going along with the flow this time. The idea of getting on a bus for 2 hours with a planeload of angry Americans was totally unappealing. So we asked if we could stay in the Icelandair Saga Lounge at the airport. There were 4 other people there for about 2 hours until their flight to Germany was ready to take off. After that we had the lounge to ourselves, and they refreshed the food and drinks regularly. We actually had a great time there. Instead of spending a total of 4 hours on a bus and 10 hours in a hotel, we chose to relax in luxury in that lounge like it was our fancy apartment. We had panoramic views of the peninsula and bay, tons of delicious food and drinks, a great fireplace to snuggle up by, showers, and a wide variety of places to sleep. Sometimes the solution is not following the pack.
We landed in Siem Reap after two flights through Thailand, and we were tired. The plan was to spend only 3 days in Siem Reap and then 3 days in Phnom Penh. But pretty much as soon as we got to our hotel in Siem Reap and thought about our plan to race through the ancient temples quickly and then move on to the next city, Ali and I admitted to each other that we didn’t want to stick to the plan. The idea of the 6 hour bus ride to our next destination being just 3 days away sounded awful.
By that time we had learned from our 2 months as full-time travelers that we really appreciate having a full day to recover and settle-in after our travel day. Ali had already booked our next hotel in Phnom Penh, but thankfully she said we should wait until we settled in before booking our flights back to Thailand or the bus between the two cities. Interestingly, Ali seems to be developing a “spidey sense” in her travel planning, which I am learning to trust. So that night we sat down for dinner and agreed we would dump the plan to move to Phnom Penh, even though we had booked and paid for the other hotel. Instead we spent the following day relaxing and extended our stay at our hotel in Siem Reap. We had a full week to explore the temples and get to know the area.
The Cambodia TRIP Lesson
This is the first situation as travelers where we chose to not follow through on something we had already paid for in advance. After 2 months of travel we had a better idea of what makes us comfortable as full time nomads, and we had improved our communication with each other on those topics. That was the day that we agreed to give ourselves room to be slow travelers, and always talk about what we need regardless of what we have planned. That was an empowering experience at the low cost of only $127 for an unused hotel stay in Phnom Penh.
We also decided at that point that travel days do not count as days spent in a location, they’re just days in between places and we admit it when travel days wear us out. Our new goal is to spend at least a week in every city, slowing down enough to really look at our surroundings. By taking the stance that the money already spent is less important than figuring out what’s best from this moment forward, we were able to make a course correction that improved our experience with a minimal downside.
Budgeting for the Sunk Cost Fallacy
Because we’ve realized the influence of the sunk cost fallacy principle on our travels, we now have a category in our budget for items that have been canceled for whatever reason. By moving cancelation costs into a specific budget line item, we can feel less guilt for those changes and we can also look at them over the course of the year and learn from them. Separating them out will help us pay attention, and also keep them from skewing the costs of other things we actually experience.
Thus far, we have only had this one instance in Cambodia where we changed plans when we had already spent money. Having finally done that, I feel more liberated and free to call a change of plan what it really is, a new opportunity. I encourage folks building out any kind of budget to add a cancellation category, whether those costs are incurred in your home town or during travels or anywhere else. I think I’m going to rename that our “better options” category now.
Moving Forward – Be Mindful and Don’t Beat Yourself Up
Sometimes there are situations where things beyond our control cost us money and fun. We can’t prevent planes from having mechanical issues or avoid unexpected weather, food poisoning, or really tough jet lag. Maybe I can be trained out of offering to hold someone else’s sick baby, but even that might not be something I want to control.
When things happen and plans change and it costs us money, we have gotten pretty good at doing everything we can to try to get reimbursed. But we know we won’t always get a refund. Sometimes money sinks and we can’t get it back. The important thing is not sinking with it.
If things you can’t control occur or new opportunities arise, and that creates sunk costs, don’t beat yourself up about the financial impact. Be mindful of your spending. And balance that with a willingness to move forward, so you can let go of money spent and make the next best decision you can. And above all else, have fun.