Sunk Costs: QB Edition
Social media was abuzz yesterday after news that Vikings quarterback J.J. McCarthy was traded to the New York Giants. Some loved it, some hated it, and some were flat-out confused. The most prevalent narrative I heard, though, was this: Why would the Vikings trade a 10th overall pick (the spot McCarthy was originally selected) for a 5th-round draft pick?
Yes, it's true that McCarthy was selected as one of the top 10 players in his draft. Yes, it's true that the Vikings received a 5th-round draft pick in return. Yes, it's true that a top-10 draft pick is much more valuable than a 5th-round draft pick. Unfortunately, none of that matters.
The Vikings didn't trade a draft pick. They traded a player they selected with said draft pick. Once they selected him, it doesn't matter where they selected him. All that matters is how much value he does or doesn't have. And yesterday, the Vikings decided his value was approximately that of a future 5th-round draft pick. That's called a sunk cost. The moment the Vikings picked him, it didn't matter what it cost them. They'd already paid the cost, and now all they had was whatever value the QB market attributed to him.
This same principle applies to everything in our lives. That car sitting in your garage? It doesn't matter what you paid for it. It's worth what it's worth....which is probably a lot less than you paid for it. That expensive suit in your closet? It's worth about zero on the market, since it was tailored to fit a one-of-one frame. The flat-screen TV on your wall? Sure, it's pretty sweet, but since a newer model is already on the market, it's worth a fraction of what you paid.
None of this is good or bad; it just is. However, this concept messes with us. Just like the Vikings fans angry that the Vikings would trade "a 10th pick for a 5th-round pick," we, too, get messed up with sunk costs. If we're not careful, we can irresponsibly assign more value to something than it's worth, sabotaging our decision-making.
Here's a recent example from my life. One of my friends purchased a house for $400,000 about a year ago. Immediately after buying it, they sank another $100,000 into renovations and improvements. Then the unthinkable happened: one spouse lost their job. They were forced to sell it. After meeting with their real estate agent, they were stunned to learn the house's market value is somewhere in the $425,000-$450,000 range. What?!?! In less than nine months, they spent $500,000 on this house, and it's only worth $425,000-$450,000?
Sunk costs. What they spent matters none. Once the money is spent, it's irrelevant. All that matters is what it's worth now. This really messed them up mentally, and they've made a string of bad decisions. Had they only come to terms with the principle of sunk costs, they would have moved on by now. Instead, they sit in a tough spot.
Always remember that sunk costs are sunk costs. The moment we buy something, we have to let it go and make future decisions on reality's terms.
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