The ugliness of sunk cost — A typical day in my class

I happen to take a common class for students who are from diverse subject backgrounds. Being a finance professor, I wondered how I can do justice to my class which has many different scholars(some are HR, a few are marketing, and the rest in finance). How do I tell them that the subjects they are specializing in are relevant and interconnected? So I wanted to convey a financial concept through the lens of life and business. At least that was the objective and I really hope I did righteousness towards 50 mins of that class.

I started off by asking students to recall the best and worst things that happened in 2021. As predicted (no surprises here), students recalled a considerable amount of bad incidents alongside a few good ones.

Here is a snippet of that recollection -

Good thing that happened

• Spending happy times with loved ones
• Doing more work in the #covid era(Is it good or bad :) )
• Becoming financially independent ( the student happen to secure a job while studying)

The bad and ugly parts that they faced

• Lost loved ones
• Lost businesses
• Unable to accept the covid situation and getting locked up at home
• Frustrated but yet not coming to terms with the new reality of virtual and online mode
• reduced cashflows ( lost jobs)
• Unable to see the big picture
• on and on and on…

Next, I asked them to review the below article about Airbus and how they messed up due to A380 jumbo jets business they were trying to invent.

The pic of the article can be seen below

Students were invited to do some soul searching around what happened to A380 and airbus in general?

I also told them to keep in mind “Tesla” which also did “hatke” in their business but succeeded. Both Airbus and Tesla had similar traits, but one failed and the other succeeded.

So it seems like airbus had big plans for a “non-existent” market ( in this case Jumbo jet which can seat up to 800 passengers with wings spanning 1 football stadium and requires airports to be modified to accommodate this beast) and since people were contemplating direct city to city connection instead of hub n spoke model ( I hope you know what I talking about), Airbus CEO felt this is a perfect opportunity to create a market to connect all cities with an ability to carry a large number of passengers. Of course, there were analysts and emirates(especially) who were gung-ho about this business plan ( and rightfully so). However, the demand never took off. A380 never saw the kind of success it was made out to be on paper. (Except our own Vijay Mallya ended up buying 10 of these jets for Kingfisher:)).

Airbus continued to pump billions of dollars when they knew the growth was not happening anytime soon. Now recall all the bad things I jotted down above. In our lives too, we refused to accept when the defeat was staring at our eyes. Wise would say, better luck next time and move on while the stupid would hold on to their conviction! Now, this is the background of the article.

Next, I asked them the definition of Sunk cost ( This is a finance concept) and what they think about the same?

Most of them were bewildered and surprised that a simple concept like Sunk cost has so much business implication and is very much related to the founders/CEO psyche. Hold on to this thought, you will know what I am talking about.

Sunk cost simply means — Mr.CEO was so egoistic that he never allowed his idea to die down and never accepted that the belief was flawed. Money was poured in, analysts were forced to write great things about his vision, and founders', hard-pressed them to keep moving in the hope of making the profit in the distant future!

This, my dear friends, is called “Sunk cost” and I hope by now you know that what we see in life and business is perfectly validated through financial concepts. This is precisely what is transpiring with new-age companies — All tech-based, an enormous amount of cash poured in and churning innovation, to create a new sophisticated market, yearning for more consumers, and everyone trying to grab the market share.

In the end, the CEO wants to satisfy his ego and so are the “dictators” of the company. Who is at loss? It's the retail investors who have rushed in their hard-earned money via IPOs. You will by now know that the majority of IPOs perform poorly over a period of time.

Before investing, look at company history, check the background of the CEO and how much he has sunk ships ( read companies) and then decide if you really want to subscribe to “that” IPO. Do some research before you dive into it. Because next time the idea he brings in will be more oversized and so is the risk of losing your shirt! The sunk cost has played its trick again. It only gets bigger in his mind!

Leaving aside finance, let us come back to my main topic and that is — what is the role of a teacher? Can we as educators see the big picture so that scholars can appreciate the topic a little better? If we fail to tinker with their brains through anecdotes, we will never be able to do justice to the teaching.

As they say,

And remember there is more than one way to communicate the concept. We are not here to teach them. We are here to show them the path. And this one last pic will summarise the entire discourse of what I wanted to convey :).Happy learning. If you like my story, do hit like and share.