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Ignore Sunk Costs (2009)

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Re: Ignore Sunk Costs (2009)

#71

Post by mlyle »

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…

> The fallacy would be giving the first option some sort of financial value because you spend time and money on it in the past.

But when we have sunk costs, we really have a past investment that we have an unknown return upon-- and we're deciding whether to abandon that investment.

If we've made a substantial investment, it can make sense to have a bias towards avoiding actions that definitely invalidate that investment-- a bias towards inaction.

It's rare that a position presents itself where it is completely clear what the future value of different tracks is worth so clearly.

Re: Ignore Sunk Costs (2009)

#72

Post by Spooky23 »

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.…

Of course the world is complex. This stuff makes sense unless it doesn’t. That $10,000 piece of land may require capital budget to utilize that you don’t have, for example.

I ran into the concert example when it was announced a couple of years ago that David Wright would take the field for the N.Y. Mets for the last time. My $12 tickets were suddenly worth $300 or more. Rationally, it would make sense to pocket a few thousand bucks. But the experience had a certain value, and I wouldn’t be able to get my kids and nieces and nephews together, in NY, etc for a year or more. So we had an amazing time and missed an economic coup.

Re: Ignore Sunk Costs (2009)

#73

Post by vkat »

readhn wrote: post #46

i strongly disagree with the author. you cant ignore sunk costs. For example, in the stock market the majority of active retail traders (>90%) get wiped out within 3 years. they continue to dump money into the market, ignoring losses (sunk costs), hoping that the next trade will help recover the losses, and then the next trade, the next ... etc. at some point one has to stop "bleeding" and re-evaluate the approach be…

The decade long bull market has been really good to a lot of active retail traders.

Re: Ignore Sunk Costs (2009)

#74

Post by zelly »

What you call sunk cost I call "equity"--whether that be tangible capital or human capital.

If you never believed in it, then you should drop it by all means. But if you take the sunk cost fallacy to heart, you will give up whenever the going gets tough, which statistically means you will give up everything you ever start.

Re: Ignore Sunk Costs (2009)

#75

Post by dannypgh »

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…

> 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

Except that's not how spending time (or money) on something works. If you spend 3 hours trying to fix something and fail, you shouldn't value the item any more. The value of the tickets doesn't go up because the time you spent on it. Selling the ticket (or keeping the ticket) doesn't get you the time back. The question to evaluate the potential sale is only which do you value more, the $500 being offered or the ticket. What you spent on the ticket is irrelevant - it's a sunk cost.

We see this with stock trades all the time. Say you bought a share of company XYZ at $100, and then a scandal broke and the value plummeted to $20. You don't think the company is worth buying for $20, either, because the scandal was that bad. Therefore you should sell it, as you think the true value is below $20. Yet, many people would hold the stock as they don't want to take the $80 loss. This is what happens when you fail to ignore sunk costs - what you paid for the item (be it in cash, or the ticket example, your time) doesn't increase its present value to you.

Re: Ignore Sunk Costs (2009)

#76

Post by zelly »

paulpauper wrote: post #24

Seth Godin's success is proof that mediocrity pays if you're early. >Or say you make a mistake and go to the concert instead of selling (those seats are $500 seats now). But Bruce is sick and Manfred Mann is substituting for him. You don’t like him so much. But you paid $500 for the seats! Should you stay? Well then the concert would be cancelled and you would get a refund. In regard to the sign, if it were accidenta…

> Seth Godin's success is proof that mediocrity pays if you're early.

Yes, recognize survivorship bias when you see it.

Re: Ignore Sunk Costs (2009)

#77

Post by stblack »

paulpauper wrote: post #24

Seth Godin's success is proof that mediocrity pays if you're early. >Or say you make a mistake and go to the concert instead of selling (those seats are $500 seats now). But Bruce is sick and Manfred Mann is substituting for him. You don’t like him so much. But you paid $500 for the seats! Should you stay? Well then the concert would be cancelled and you would get a refund. In regard to the sign, if it were accidenta…

According to this post, dated August 8, 2019 and titled "Streaks", Seth has been blogging for 11-years straight without missing a day.

His posts appear hours before I awake every day, despite us being in the same time zone.

So your comment, "Seth Godin's success is proof that mediocrity pays if you're early", should be retracted.

Edit: I forgot to include the link: https://seths.blog/2019/08/streaks/

Re: Ignore Sunk Costs (2009)

#78

Post by zelly »

readhn wrote: post #46

i strongly disagree with the author. you cant ignore sunk costs. For example, in the stock market the majority of active retail traders (>90%) get wiped out within 3 years. they continue to dump money into the market, ignoring losses (sunk costs), hoping that the next trade will help recover the losses, and then the next trade, the next ... etc. at some point one has to stop "bleeding" and re-evaluate the approach be…

To be fair trading is a zero-sum game with extreme information asymmetry between players. Business/investment is mostly positive-sum. I don't think we can extrapolate lessons from trading to the real world except the lizard-brain human psychology of it all.

You can have a trading strategy that loses 999 trades but hits the jackpot 1/1000 times, and you can still lose all your money because you don't have infinite capital. In business you can try an outlandish moonshot and increase your odds of winning every day because your work gets you closer to the goal. (And typically your business goal isn't to take money from resourceful hedge funds on the other side of the trading desk, so it's a little easier.)

Re: Ignore Sunk Costs (2009)

#79

Post by iamtheworstdev »

I keep a list of things I wish all people were taught in their education. From the business side the list is: sunk cost, opportunity cost, the iron triangle, and game theory. I try to preach them to everyone because they explain most business decisions. https://www.iamtheworst.dev/2019-06-26-business-terms

Re: Ignore Sunk Costs (2009)

#80

Post by anoother »

Spooky23 wrote: post #72
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.…

Of course the world is complex. This stuff makes sense unless it doesn’t. That $10,000 piece of land may require capital budget to utilize that you don’t have, for example. I ran into the concert example when it was announced a couple of years ago that David Wright would take the field for the N.Y. Mets for the last time. My $12 tickets were suddenly worth $300 or more. Rationally, it would make sense to pocket a few…

The way I see it, you didn't miss the coup. You got a $300 experience for $12.

I'm monetary terms, you got the exact same outcome as if you'd have sold the tickets.

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