Sunk cost and opportunity cost explain the low quit rate during the great recession.

One Reason to Quit A Job

Jun 14, 2014 • Behavioral Economics, Labor, Macroeconomic Measurement, Thinking Economically • 308 Views    No Comments

Have you ever gone through a series of phone messages that finally take you to the department you need? Then, after 5 minutes, 10 minutes, 15, no one picks up and you start to wonder if you should hang up.

Deciding what to do, most of us focus how long we have waited. Called our sunk costs, what we have “spent” in time and aggravation up to this point shapes our decision. We think, “I have waited this long so I should remain a bit longer.”

Sadly though, we are ignoring the opportunity cost, the sacrificed alternative. Maybe, because hanging up frees us to do an important task, as an alternative to remaining on the phone, it has more benefits..

The key here is not to base a decision on how much the past cost you–on your sunk costs. Instead, use future benefits to make that decision.

In a recent podcast, Freakonomics guru Stephen Dubner said quitting was all about sunk cost and opportunity cost. Do take a look at the JOLTs data below. It appears to confirm his explanation.

Sunk Cost and opportunity cost help us decide whether to quit.

From: BLS

A part of the JOLTs (Jobs Openings and Labor Turnover) data, the quitting numbers tell us the volume of voluntary job leavers. You can see that during the recession, the quit rate plummeted. At that time, jobholders contemplating leaving might have decided to stay because they had invested considerable time into their position (sunk cost) and also because the benefit of quitting (the opportunity cost) would not have been another job. With sunk cost and opportunity cost analysis converging, fewer people quit. Now though, the quit rate is starting to climb. Now sunk cost and opportunity cost each would lead you down a different path.

Our bottom line? Whether deciding about a phone queue, leaving a job or selling stock and breaking up a relationship, whatever the decision, if sunk costs are a consideration, be sure to think about the benefits of the opportunity cost also.

Please do share examples of sunk costs in a comment. It would be interesting to create a list.

Sources and more...As always, the Freakonomics podcasts had some great stories. For quitting, they took listeners to the minor league baseball players who had little chance of making the big league.

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