Saturday, December 10, 2005

sunk cost

Barry Schwartz, in The Paradox of Choice (which I finished so can cross off my list), talks about "sunk costs". He mentions those expensive shoes you bought that are sitting in the back of the closet. You keep them even though you know you're never going to wear them again, because to get rid of them would force you to acknowledge a loss.

Similarly, people hold on to stocks that have decreased in value because selling them would turn the investment from a potential loss into an actual loss.

What should matter says Schwartz, are the prospects of future performance, but what seems to actually matter is the level of previous investment. He believes that "sunk-cost effects are motivated by the desire to avoid regret rather than just the desire to avoid a loss". "Regret avoidance" is a stronger demotivator than simple "loss avoidance" because taking the corrective action forces you to acknowledge the source of the regret, which is your personal responsibility for an initial decision which has turned out to be flawed.

His final example is Vietnam, and is apropos of the suddenly-legitimate argument, thanks to Jack Murtha, that we should get out of Iraq quickly:

And arguably, why did the United States persist as long as it did in Vietnam, even when it was plain to virtually everyone involved that no good outcome could result from continued involvement? "If we get out now," people said, "then all the thousands of soldiers and civilians who have died will have died in vain." This is thinking in terms of the past, not the future. Those who had died were dead and could not be brought back. The questions that should have been asked (all moral and political considerations about the appropriateness of the war aside) concerned the prospects of soldiers and civilians who were still alive.

Maybe we should leave Iraq soon, or maybe we should remain "as long as it takes". But the reasons to stay should not include that otherwise those who died did so in vain. Or that leaving would force us, or more specifically the President, to acknowledge and therefore take responsibility for, the error of the initial decision.

These are powerful, but not valid, reasons to remain in Iraq. They represent the fallacy of the sunk cost.

1 comment:

nickensr said...

Does not the high divorce rate in the United States sink the “sunk cost” theory? Or maybe the fact that fat and ugly people never seem to find true love, surly their former partners who have spurned the fat/ugly people do not believe in “sunk cost”. And at what point does “sunk cost” intersect with situational sobriety?