Monday, November 01, 2010

Sunk Costs vs. Opportunity Costs: Economics 101

When you're trying to make a  major life decision, in this case whether or not to stay in academe (or whether or not to finish an M.A. or Ph.D.), it's easy to get trapped in a vicious cycle of worry, self-doubt, and anxiety about the future. "Should I or shouldn't I do X? . . . What will happen if I stop doing Y? . . . Am I ready to take such a huge step right now? . . . Perhaps I should wait until next year? . . ."

If you're trapped in a perpetual moment of indecision, these are the types of questions that will soon begin to haunt the halls of your mind, both during your waking and your dream life. It's not fun to be stuck in the middle, constantly looking backward, with no clear way of moving forward.

So what factors should you be weighing when trying to decide which path to take right now? These will invariably differ depending on individual circumstances, but it might make things easier for you if you stop to consider two concepts that economists call "sunk costs" and "opportunity costs."

Are you a gambler?
First, some definitions:

Sunk Costs: These are the costs (in time, money, mental and emotional energy spent, etc.) incurred in the past as a result of a decision made long ago. It's now impossible to recover these retrospective costs. You may have spent 6-8+ years in grad school and wracked up $50K in student loan and credit card debt, or way more in my case, to obtain a humanities Ph.D., but there is nothing you can do about that now. Unless time travel becomes a realistic possibility sometime soon, it's too late to go back and change your mind or take a different path. 

Opportunity Costs: These are the immediate costs of not taking the next best alternative or, in economics speak, of not putting a resource to its best use. Your Ph.D. in English, for example, might be of greater use in the corporate world rather than in academe, particularly if you've been looking for a full-time position for several years and are still coming up empty handed. The time/energy you're currently spending adjunct teaching at four different commuter campuses (for $3,000 per course, per semester, and no benefits), would most definitely be better spent on some other method of professional development that involved greater financial and career returns.

While it may seem like moving into another career, or investing further energy and money in a completely new professional path outside academe, is essentially wasteful (and depressing) at this point, sometimes it's better to start afresh. The fact is that continuing to stay un/under--or miserably--employed in academe is not going to get back what you've already sunken into the Ph.D. any more than leaving the ivory tower would.

Opportunity costs, on the other hand, are still in play. Sure, it's safer to stay with what you know and continue looking for academic work: joining the professorate in is what you've trained to do; academe is the world you're comfortable with. But what's the cost? If your energies and time could be better spent looking for a non-faculty administrative position, or learning HTML, or volunteering at a private school, or working part-time at a library, or taking business courses, and so on, the long-term cost of not doing any of these useful things could be great indeed. It's always a risk to move in a new professional direction. No argument there. But what's the cost of treading water? And more importantly, especially if you're currently unhappy, what's the emotional cost of remaining immobile, trapped in a job, or a location, or a stage of life that you hate? What's the point of all this suffering?

Maybe the best thing you got out of pursuing a fancy doctoral degree was the knowledge and skills attained in the process. Maybe,10 years from now, not landing on the tenure track will turn out to be the best thing that ever happened to you. Either way, it's critical to make a decision rather than continue to torment yourself needlessly. You might make the wrong choice, or you might not, but stalling is not going to make the transition process any easier.

I'll conclude with a few question worth pondering for any job seeker currently stuck in limbo:

1. What are the sunk costs of my professional choices thus far?

2. Am I willing to concede that these retrospective costs will never be returned to me and thus shouldn't have a bearing on my decisions now?

3. What's the opportunity cost of inaction?  What am I missing by remaining in academe?

4. What could I gain if I chose to walk away or began to take steps in a new direction?

Am I saying that every non-academic opportunity out there is worth taking, no matter the cost? No, not at all. Instead, I'm advising you, the job seeker, to consider the cost(s) of not doing things that might help you to transition out of academe at the same time that you consider the costs of doing them.

6 comments:

WorstProfEver said...

Nicely put -- sunk cost thing is an important idea when you've got a degree under your belt.

I'd also add that a job you hate can actually cost you money. I was just telling someone about an article I read (and still can't find!) that emphasized the financial cost of hating your job -- for instance, spending extra money on booze or entertainment to numb the pain, medical bills from stress-induced problems, etc. In my case, it was 5k worth of orthodontia to correct the damage I'd done grinding my teeth in teaching-induced anxiety. Sigh.

Eliza Woolf said...

Good point about career misery causing all sorts of other problems.

I, too, know all about job related, stress-induced health issues and mental crazies. I didn't have a problem with TMJ or anxiety until grad school and have been generally unable to get rid of these problems since finishing my Ph.D. Maybe it's academe in general that's the issue or, maybe, I'd still be experiencing all of the above in a completely different profession. Who knows? But I'm ready to stop dwelling on the sunk costs in any case!

Caitlin said...

Hear, hear, Eliza. The sunk costs argument is a fallacy. The career transition thing isn't exactly a piece of cake either, but there's a funny sort of peace that comes from declaring that my priorities are making a viable, permanent, financially sustainable life for my family.
I just wish someone had told me, back when I focused all my energies on following my bliss, that just making a living could be so hard.

Eliza Woolf said...

No kidding! I was so naive when I assumed that making a living would be the least of my worries. I always thought that following my passion and doing what I "loved" career wise, irrespective of salary, was the only thing that mattered. And that was pretty much true at age 22; I was poor but didn't care. i didn't mind being single living with several other grad students, eating beans and rice, biking everywhere, not having any credit cards. Things have certainly changed over the past 10 years . . .

Anonymous said...

Love your article. I left academia and USA after my PhD. Due to my unique situation (immigrant, single woman with student visa in the US), I had to take a decision. What you wrote about opportunity cost is so right on. It is truly eye-opening.

Thank you for the honest article.

Tinu

Tod said...

This is cool!