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Ignore Sunk Costs (2009)

seths.blog

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Re: Ignore Sunk Costs (2009)

#31

Post by duxup »

In business I wonder how much reinvestment / continued investment is because someone doesn't understand sunk costs.....or they just don't want a mistake to be highly visible / rock the boat? So they just continue on.

I worked at a company where they outsourced some work. It became clear that the outsourcing was both more expensive than domestic work....and the domestic folks were using up time fixing outsourced work.

The outsourcing was the VPs first big initiative as a VP.

There was lots of talk about just moving on and not worrying about sunk costs, but they carrried on with the outsourcing...I don't think it was because he didn't understand sunk costs.

Re: Ignore Sunk Costs (2009)

#32

Post by gravitas »

svnpenn wrote: post #8
therockspush wrote: post #2

Probably do better reading these all in one place than trying to cobble them together from random blogs from 2009. This one is the Irrational escalation or Escalation of commitment/Sunk Cost Fallacy. https://en.wikipedia.org/wiki/List_of_cognitive_biases

Seth's blog is arguably one of the most popular blogs of all time, so it's not a "random blog". The fact that you haven't heard of it says more about you than the blog.

Holy cow I've never wanted HN karma more than to downvote you looking down your nose at another person just because they'd never heard of something. I've never heard of Seth's blog either, it's just a random blog I'll probably never visit again unless linked here.

Re: Ignore Sunk Costs (2009)

#33

Post by asperous »

nullc wrote: post #25
dvt wrote: post #9

The "argument from waste," as economists call it, makes sense from a business and investment standpoint, but I'm a staunch believer that in every-day decision making (barring Vegas trips) it isn't usually a fallacy [1]. The paper cited is abstract (and borrows from Nozick, who also wrote a criticism of the sunken cost fallacy in the early 90s). But the conclusion is: > Sometimes it is reasonable to honor sunk costs.…

You don't need to invoke social narratives and consistent behaviors to justify honoring sunk costs. Sunk costs are often a predictor of a developed position. For example, you spend 20 years in advancing in field and then worry that you might not like it that much anymore. If you avoid leaving the field purely because of the sunk time, you are honoring a sunk cost. If you avoid leaving the field because your 20 years…

For sunk costs, you are supposed to consider your all options including the sunk cost project.

For your example your options might look like:

* Stick with industry, 0 year lead time, no cost, possible sadness, low risk

* Slight change, 2 year lead time, $20,000, moderate happiness, medium risk

* Vast change, 10 year lead time, $100,000, unknown happiness, high risk

The fallacy would be giving the first option some sort of financial value because you spend time and money on it in the past. You are just supposed to look at your options looking forward only.

Re: Ignore Sunk Costs (2009)

#34

Post by mikeryan »

goldcd wrote: post #14

Of course you should ignore "sunk costs" - the problem is deciding what's a "sunk cost" and what's "an investment" with an associated probability on its return. To riff on the example say you were prepared to pay $300, you paid $55 and you're being offered $500 on the door. Yes. You probably would sell the tickets, for $445 profit. However maybe you flew into the city for $200 and booked a hotel for $100. You've now…

The Springsteen ticket example is a horrible one.

It turns out the amount of time you spent getting the tickets is irrelevant.

No its not my time is worth something.[1] If I spent 3 hours getting the tickets and I value my time at $150 an hour then the value of the tickets is now $505 and I'm only getting offered $500

Also the value of a ticket "To Me" may be worth more than $55 I spent. It might be worth $1000 in my mind for a chance to see Bruce regardless of what I spent.

[1] One of my great life hacks as I've gotten older is valuing my (particularly free) time at some amount - usually $150 per hour. Have a task I can pay someone to do and get the time back on a weekend? - $150 x Time of Task is the amount I'm willing to pay.

Re: Ignore Sunk Costs (2009)

#35

Post by turboturbo »

mikeryan wrote: post #34
goldcd wrote: post #14

Of course you should ignore "sunk costs" - the problem is deciding what's a "sunk cost" and what's "an investment" with an associated probability on its return. To riff on the example say you were prepared to pay $300, you paid $55 and you're being offered $500 on the door. Yes. You probably would sell the tickets, for $445 profit. However maybe you flew into the city for $200 and booked a hotel for $100. You've now…

The Springsteen ticket example is a horrible one. It turns out the amount of time you spent getting the tickets is irrelevant. No its not my time is worth something.[1] If I spent 3 hours getting the tickets and I value my time at $150 an hour then the value of the tickets is now $505 and I'm only getting offered $500 Also the value of a ticket "To Me" may be worth more than $55 I spent. It might be worth $1000 in my…

The value of the tickets doesn’t increase with the effort you spent towards them.

Re: Ignore Sunk Costs (2009)

#36

Post by nullc »

asperous wrote: post #33
nullc wrote: post #25

Earlier quoted context omitted.

You don't need to invoke social narratives and consistent behaviors to justify honoring sunk costs. Sunk costs are often a predictor of a developed position. For example, you spend 20 years in advancing in field and then worry that you might not like it that much anymore. If you avoid leaving the field purely because of the sunk time, you are honoring a sunk cost. If you avoid leaving the field because your 20 years…

For sunk costs, you are supposed to consider your all options including the sunk cost project. For your example your options might look like: * Stick with industry, 0 year lead time, no cost, possible sadness, low risk * Slight change, 2 year lead time, $20,000, moderate happiness, medium risk * Vast change, 10 year lead time, $100,000, unknown happiness, high risk The fallacy would be giving the first option some so…

> You are just supposed to look at your options looking forward only.

In most realistic scenarios your estimations of the payoff matrix has a significant uncertainty. It isn't just that there is risk, but your estimation of the risk is uncertain as well (as well as your estimation of your estimation, and so on).

When reasoning under uncertainty we can usually achieve significant benefits from regularizing the decision.

"Do what everyone else is doing", "Keep doing what I was already doing", and "Do what is most consistent with my past investments" are time tested highly effective regularizers. When we are trying to rationalize taking actions that defy billions of years of evolved heuristics for reasoning under uncertainty we call the first 'bandwagon fallacy', the second 'status quo bias', and the third 'sunk cost fallacy'.

There is often a fine line between rational decision making and rationalization. Awareness of the ways that people sometimes make errors in their decisions can be useful, but one should take care to avoid using a little bit of knowledge to come up with specious justifications for poor choices.

Much of the time I see the word 'fallacy' used it sure seems to be sophistry. When a reasoned position is better you can just state why its better outright and the justification will stand up on its own merit without any invocation of a named fallacy.

Re: Ignore Sunk Costs (2009)

#37

Post by GuB-42 »

I believe there is a reason the sunk cost fallacy exists, instinctive behavior patterns come from millions of years of evolution, and I believe that if they were totally wrong, they would have been selected out.

For example, imagine you are a predator, chasing some prey, on the way, you see a prey that looks easier to catch, the "no sunk cost" solution is to stop the chase and go after the new target. Then you see a new one, then a new one, then a new one, etc... In the end, you will probably be to busy changing targets to catch anything. That behavior is commonly exploited, just look at kids playing tag, taunting "it" by putting oneself in relative danger is a common strategy, and the counter is to ignore the taunt and focus on a target, even if it is not the easiest one, i.e. honoring sunk costs.

And the $500 proposal for the $55 ticket doesn't make it a $500 ticket. When you buy a ticket, you pay the price of the ticket, plus everything that goes with it: free time, getting there, uncertainty and risk, and all the emotional investment that is harder to quantify... Imagine you value that at $500, so including the $55 ticket, that's a $555 experience, the reason you wouldn't have bought a $500 ticket is that it would have made it a $1000+ experience.

And here you see why refusing the $500 proposal is not necessarily a mistake. The guy is offering you $500 for a $555 experience.

So yeah, good to know about the sunk costs fallacy, but I believe it is also important to understand why that "fallacy" exists, and how to properly evaluate costs, even those without a clear price tag attached to it.

Re: Ignore Sunk Costs (2009)

#38

Post by wrkronmiller »

GuB-42 wrote: post #37

I believe there is a reason the sunk cost fallacy exists, instinctive behavior patterns come from millions of years of evolution, and I believe that if they were totally wrong, they would have been selected out. For example, imagine you are a predator, chasing some prey, on the way, you see a prey that looks easier to catch, the "no sunk cost" solution is to stop the chase and go after the new target. Then you see a…

Alternatively, the sunk cost fallacy is a heuristic that compensates for the fact that calculating marginal value (especially in high-pressure settings) is hard.

Evolution has also selected for more powerful brains that allow us to develop more sophisticated frameworks (e.g. law, science) for reasoning than pure emotion.

Re: Ignore Sunk Costs (2009)

#39

Post by baddox »

DubiousPusher wrote: post #20
dvt wrote: post #9

The "argument from waste," as economists call it, makes sense from a business and investment standpoint, but I'm a staunch believer that in every-day decision making (barring Vegas trips) it isn't usually a fallacy [1]. The paper cited is abstract (and borrows from Nozick, who also wrote a criticism of the sunken cost fallacy in the early 90s). But the conclusion is: > Sometimes it is reasonable to honor sunk costs.…

It seems to me like one simply should incorporate social costs into the calculation. If your wife was looking forward to the concert and doesn't give one whit about modern economic theories like sunk cost, her disappoinment at not following through with attending the concert tonight is not a sunk cost, that's a future cost which you should weigh.

Yep, that’s a future cost of the decision to not go to the concert, not a sunken cost like the cost of the ticket. It’s not relevant to the discussion of sunken costs.

Re: Ignore Sunk Costs (2009)

#40

Post by baddox »

dvt wrote: post #19
defertoreptar wrote: post #12

Earlier quoted context omitted.

I'm not sure I'm following. In the example, there's a sunk cost of dressing up and setting aside time. Then, other than sunk cost, there's the probable future cost of reduced cooperation as well as cost in rapport and morale. I don't see those things as sunk cost because the decision to go or not go can influence those costs.

The idea is this: the "rational" thing would be to sell the tickets for $500 a pop. However, even if there's just a probability of cooperation and social rapport suffering†, it wouldn't be irrational to honor the sunk cost and still attend the concert. In the paper, the "Camping Rainstorm" example is similar in spirit. Instead of the protagonist suffering what the author calls a "diachronic misfortune," maybe in havi…

It’s not rational to choose receiving $500 and having your wife and friends be upset at you, unless you value the $500 more than having your wife and friends be on good terms with you. That’s a tautology, of course, but apparently it needs to be said.
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