More evidence that thinking through basic economic concepts can help you make better decisions.
Last week, my wife asked me to pick up some prescriptions from the CVS Pharmacy that’s on my way home from work. I forgot. When I got home, she reminded me. I turned around and drove to CVS, a drive that takes about 6 minutes. (You’ll see why this matters anon.)
When I got there, I called my wife, Rena, to tell her that there were at least 9 people in line in front of me and so if she was hungry, she should go ahead and eat without me. She told me I should come home and try again when it was less busy. I said no because it would take no longer now than it would for a future trip.
Here’s the key fact. There were two sunk costs here: my 6 minutes in getting to CVS and my 6 minutes to get home. How was the 6 minutes to get home sunk even though I hadn’t borne it yet? Because I didn’t plan to stay overnight at CVS.
That means that there was a sunk cost of 12 minutes.
If I were to go home, I would need to go there some other time. Let’s say I chose a time when there was no line. (That has NEVER happened, by the way.) So then the time cost of getting to the front of the line is 12 minutes.
So the right comparison to make is the 12 minutes some other time with the X minutes I expected to be in line that evening. Eyeballing it, I estimated that X would be about 15 minutes. That would mean that I would save at most 3 minutes by going home and coming at a different time. So I decided to stay.
As it turned out, my time in line was about 18 minutes. So I lost at most 6 minutes by staying.
I think I made a good decision. Remember that it was extremely likely that if I went at any other time, there would be some line and, therefore, some extra minutes.
You could counter that if I went to CVS the next day on the way home from work, I would not bear a cost of 12 minutes. It would be more like 3: 2 to turn off the main road and find a parking space and 1 to get back on the main road. True. And relevant if I had a good memory. But there was a good chance that I would forget the next day too. Also, the odds would be that I was coming home at around 5:00, which is when the biggest lines appear.
This analysis, by the way, is much like a similar analysis of sunk costs that Charley Hooper and I did in Making Great Decisions in Business and Life.
Here’s that passage, from page 45:
About 15 years ago, I (DRH) was visiting an economist friend and helping him work on his house. He decided to get some weather stripping for a window, and so we hopped into his car and went to the local hardware store. He found what he wanted, but was disappointed that the price was $10 rather than the $6 he expected. Our conversation went like this:
Jack: Let’s go. I’m not willing to pay $10. I’ll find another hardware store some other time.
David: Wait a minute, Jack. This makes no sense. You showed by your behavior that the weather stripping was worth at least $10 to you.
Jack: How?
David: You got in your car and drove ten minutes to the hardware store, which makes the round trip 20 minutes. If your time is worth at least $12 an hour, and I’m sure it is, then you bore $4 in time costs to make the round trip to the hardware store. So that $4 in time that you were willing to pay, plus the $6 in out-of-pocket expenditure you were willing to pay, adds up to $10, the price they’re charging. Now that you’re here at the hardware store, the cost of getting here is sunk, and the cost of getting back to your house is sunk unless you plan to live in the hardware store. So you should ignore those costs and buy the weather stripping.
Jack agreed with my analysis but refused to buy the weather stripping, even though he later had to make another trip and incur yet another $4 travel expense. The only way that he wouldn’t have had to pay at least $10 would have been to wait until he was running other errands and just happened to pass by the hardware store that sold the weather stripping for $6.
