Pater Familias

Theories, observations, and articles, by Philip Schaefer · All posts · Categories

WHY SUNK COSTS SHOULD BE IGNORED.

January 2, 2012 at 1:16 PM · Baseball, Economics, Politics, Sports

WHY SUNK COSTS SHOULD BE IGNORED. Kids, you have probably encountered the the economic argument that it is a fallacy to take sunk costs into consideration in making a decision (“sunk costs” are defined in this wikipedia article as “retrospective (past) costs that have already been incurred and cannot be recovered.” My post here provides an example of an economist who rigorously refuses to take sunk costs into effect in reading books: “Tyler Cowen in DISCOVER YOUR INNER ECONOMIST says that you should always be willing to treat ‘sunk costs as sunk’, to ‘let bygones be bygones.’ He says he follows this precept by finishing only one out of every ten books he starts.”

The wikipedia article points out that although economic theory says that it is irrational to consider sunk costs in making decisions, evidence from behavioral economics shows that: “Sunk costs greatly affect actors’ decisions, because many humans are loss-averse and thus normally act irrationally when making economic decisions.” An article in the American Economic Journal Microeconomics (November 2011) by Sandeep Baliga and Jeffrey C. Ely—“Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge”—gives the example that: “France and Britain continued to invest in the Concorde supersonic jet after it was known that it was going to be unprofitable.” Nick can sympathize with another example: if a baseball team takes on a very expensive contract with an outfielder who is not good enough to play, it would be rational to release the outfielder and move on.

2 comments

Nick January 4, 2012 at 4:01 PM

Alex Rios. Ugggghhhhh.

Mary Jane Schaefer January 15, 2012 at 4:37 PM

When you say “sunk cost,” I think of how I kept going in graduate school, till I got my Ph. D, even though I’d taught for five years and knew it was no longer what I wanted to do with my life. For years since then, I repined over my lost youth, etc., when I could have been doing SOMETHING else, anything else, rather than working away on my hated dissertation, etc. However, now that I’ve been writing full-length plays for a while, I can see I got quite a bit of my discipline from John Maynard, my dissertation director. I learned patience, but also how to pace myself from chapter to chapter. I learned how to incorporate research into a body of work that’s my own thought. I’ve become a marathoner, rather than someone who can produce only short plays. (I like to write short plays, but I like the option of producing a major piece as well.) So, “Shakespeare in the Dark,” when it’s finally launched, will owe at least a little debt to those years when I “wasted” my time preparing for a career I later walked away from.

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