Sunday, July 08, 2012

Sunk costs

Okay, then! Two days, 48 hours – done.

. . . . . . . . . . . . . . . . . . .

From what I can tell, there’s been a fundamental debate going on in economics for a while that overly-simplistically boils down to, “Do people act rationally when they make economic decisions or not?”

Now, to this non-economist, the answer to that one is blindingly obvious. Of course they don’t act rationally when it comes to money. But evidently, there were economists who made all kinds of complicated mathematical models – and careers - based on so-called “rational actors” in the marketplace.

Anyway, I think the economists’ argument is now over exactly how and when are people irrational in their financial decisions, in what ways are they irrational, what factors cause them to be more irrational or more rational, etc.

One of the triggers for irrational financial decisions is the sunk costs fallacy, which our grandparents would have called “throwing good money after bad.” It’s the compulsion to keep spending money on something because you’ve already spent some amount of money on whatever it is. If you stop now that money already spent (the sunk costs) will be wasted, but if you spend just a little more, then you can recoup the money you already spent, or maybe make a profit, or maybe just lose less than if you just abandon the project and walk away.

Now that may be true, but often it’s not, and it seems just as hard to walk away when walking away is the rational thing to do as when it’s not.

Emotionally, most humans just can’t stand to totally waste that money already spent - or admit that they’ve already wasted it, with the blow to reputation and ego that goes along with that. Which means that it becomes difficult to rationally assess whether or not this is a case where a little more money will be a net benefit even if that’s just less loss, or whether a little more money is just prolonging the bleeding.

When these kinds of emotions enter the picture, people can’t even think rationally about thinking rationally, and will rationalize all kinds of bad decisions indefinitely – or until they run out of money altogether.

. . . . . . . . . . . . . . . . . . . . . . .

When I was thinking about quitting smoking I was hoping to put that bit of irrationality to work for me. Those 48 hours are now sunk costs. If I backslide now, they’re wasted.

It wasn’t really that big a deal, but it was a real nuisance, those two days of constantly having to tell myself, ummmmm, no. Yes there are four cigarettes in the kitchen cabinet that were the ones left in the pack when I went to bed Wednesday night and yes, oh yes, it would be very, very satisfying to smoke one, just one, but . . . . no. Just don’t.

I really should throw those away. I’ll go do it now.

[published 7//11]

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