Something's Gotta Give: The Three-Constraint Problem and the Sunk Cost Fallacy

Two roads diverged in a wood, and I—
I took the one less travelled by,
And that has made all the difference.

The Road Not Taken, Robert Frost (1874 – 1963)

Financial planning, at its best, is not just about investing client assets and growing wealth; it's about helping people make informed choices that align with their goals and priorities. However, helping people make decisions is often much more complex than making a choice between two paths. In fact, it frequently comes down to a trade-off between several competing priorities. This is where an understanding of the classic three-constraint problem, borrowed from the world of project management, can help provide a useful framework for helping clients make informed choices.

To understand the three-constraint problem, imagine a simple triangle, with cost, quality, and time at each of the corners. You can often get a combination of two but achieving all three simultaneously proves much more difficult. So, if you want to get high quality on a tight deadline you should expect much higher costs. If you seek to keep costs down, you might need to compromise on quality or allow more time. We can observe the same effect when trading in the stock market, where the three constraints might be the price of a stock, the number of shares you want to buy, and the time allowed.  Depending on the motivation of the investor, the priority given to one of those elements will impact the others. A focus on price, for example, will require flexibility on quantity or time.

The three-constraint problem – or trilemma – is certainly useful for understanding project management or trading, but how can we apply it to making real-life choices?  Here, I can provide a personal example. 

Just like any other financial professional with a busy work life and family responsibilities, I am always juggling priorities. However, when I chose to pursue a part-time PhD as well, the addition of another ball in my already precarious juggling act put me squarely in the path of the three-constraint problem.  Trying to find time for research while working full time and being there for my family took a heavy toll, where either the quality of either my work, my PhD, or my family was compromised.

Of course, something had to give. I had invested countless hours, money, and emotional energy into my PhD and the thought of letting it all go felt like failure. But I recognised that there was another factor at play, a cognitive trap that's all too common - the sunk cost fallacy. The significant commitment I had put into my PhD urged me to persist, despite the imbalance it was causing. To be comfortable with my decision to withdraw from the programme, I had to separate my past commitments from my present choices and future wellbeing. Recognising that, I was able to make the difficult decision to abandon my doctoral pursuit, choosing to focus on my work and family instead.

Every day, financial planners are working with clients to help them resolve their own three-constraint problems. They might want to enjoy a secure and comfortable retirement, retire early, but not compromise on their current lifestyle. Well, guess what? Something’s gotta give. Life is a perpetual negotiation between our desires and our resources, and the idea that we can have it all is pure fantasy for most of us. Living with the three-constraint problem has taught me that. In addition, the sunk cost fallacy has shown me the importance of weighing decisions based on their current and future repercussions, rather than clinging to the past.

As I move forward, I carry these lessons with me - in my professional practice and my personal life. The perpetual dance with cost, quality, and time continues. But now, I am more prepared, more aware, and perhaps, a little wiser. I know I can't avoid trade-offs, but I can better choose which ones to make. Standing in the wood, Robert Frost was presented with a simple dilemma – which path to take. But, as we have seen, a trilemma is more challenging and requires a better decision framework.  Coming to terms with the knowledge that you can’t have it all and being honest with yourself about your limitations allows you, ultimately, to make peace with letting go. And that, really, has made all the difference.