Thinking at the Margin (and Ignoring Sunk Costs)

Total tells you whether to do something. Marginal tells you when to stop.

4 min readQuick check inside

The big idea

Do the next thing only if its extra benefit is bigger than its extra cost. Money that’s already spent and can’t be recovered shouldn’t factor in.

Tom Cruise is deciding whether to do his own stunt. Benefit: an estimated $10 million box-office boost. Cost: about $3 million in prep and insurance. Benefit is bigger than cost, so he jumps. That’s cost-benefit analysis.

Most real decisions aren’t yes-or-no, they’re “how much?” Serena Williams’ first hour of training brings a big improvement and the fifth hour brings only a little. She should stop when marginal benefit equals marginal cost. Gordon Ramsay should open one more restaurant only if the extra profit beats the extra time, rent and risk.

Then there’s the trap. If Leo is $50 million into a movie that’s going badly, that $50 million is a sunk cost. It’s gone either way. Smart choices look forward, not backward. The only question is whether the future benefits beat the future costs.

Spot it in the wild

Bad moviesWalking out of a terrible film you paid for is the economically rational move.
TicketsA $500 concert ticket shouldn’t stop you from taking a better opportunity. The money’s already spent.
BusinessCompanies that keep funding failing projects “because we’ve already invested so much” fall for the sunk cost fallacy.

Quick check

Tap an answer.

You’ve spent $2,000 fixing an old car. It needs $3,000 more, but a better car costs $2,500. What matters for your decision?

The $2,000 is sunk. Compare only the future costs and benefits of each option.