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What We Teach

How We Teach Sunk Cost in YE

In Youth Entrepreneurs, students learn how to use economic thinking to solve entrepreneurial problems. Students explore this framework for economic problem-solving through what we call the “4 S’s,” which are Scarcity, Self Interest, Subjective Value and Sunk Cost. Here we explore the idea of Sunk Cost.

“Sunk cost is the way we expense the scarce resources that are unrecoverable, that we can’t get back,” Lydia Hampton, YE Training and Curriculum Specialist and former YE educator, said. “It’s time, attention or money that is no longer available.”

It’s important that this is taught as the last of the 4 S’s, as an understanding of scarcity, self interest and subjective value is crucial in assessing when there is sunk cost.

Before working as a YE training specialist, Lydia was a YE teacher in the classroom herself. One of her favorite aspects of teaching sunk cost is YE’s emphasis on the need to pivot. This is revealed in a number of YE activities which teach sunk cost continually throughout the curriculum.

“Sunk cost is the last one we talk about because students need to understand scarcity first,” Lydia explains. “Subjective value also shows the way I spend my time may not be the same as others, it’s all subjective to the person. And self-interest, doing good by others for others, teaches us about not being greedy. So when it comes to sunk cost, I may have done something that I thought was creating value for others, but if I learn that it wasn’t, I can’t get those resources back.”

One of Lydia’s favorite ways to help students understand sunk cost is to use a dating metaphor, which tends to make teenagers’ ears perk up! She expresses that if you spend time with someone but then realize it’s not going to work out, you should consider the time and effort a sunk cost, and move on. Students relate to this explanation of the scarce resource of time - how it’s unrecoverable - and it motivates them to do better moving forward.

In classroom games like Pit and Boneyard, students learn that just because they started out one way strategically doesn’t mean that’s how they have to finish. Over the course of the activity, they might see a path that will result in a better pay off with a change of course. In this experience, they also see that the time they’ve already spent may be sunk, but the best decision is made based on what’s happening now, in reality.

Lydia has seen this lesson land with students the most during Market Day or working through Strategyzer’s Business Model Canvas. Often, students realize halfway through a project that their product is too expensive or there’s a reason people don’t want to buy it, so they must change course to find something more effective. And if they don’t, they risk losing even more resources.

“You’ll see students that will pivot just in the way they’re marketing their product or even in smaller ways. Either way, once they realize that just because they have spent X amount of time working on it doesn’t mean they have to pursue it. If they’re not passionate about it, there’s no reason they need to keep giving scarce resources away.”

Students carry their understanding of sunk cost into the rest of life, too. Young people understand they have three scarce resources in time, attention and money, no matter their circumstance. That causes them to consider how they’re spending those resources and be more intentional with their lives. That can really change things, from how they approach taking classes in college to how they pursue relationships to how they invest in a business idea.

“If we can convey to students that it’s all about recognizing and learning from failure, and pivoting, then everyone is able to create the greatest value for themselves and others over time.”