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Thursday, July 27, 2006

Sunk-cost model

An interesting post on the sunk-cost model reveals that economists should remain the most immune to its generally lousy outcome.
Education. Research shows that the sort of person who is least likely to engage in sunk-cost reasoning is (drum roll, please) an economist. Economists are trained to avoid this, are shown how easy it is to fall into it, and are shown why it is fallacious reasoning.
Sunk-cost relates to the dogged persistence in people that have invested their own money and ordinarily would show rational behavior if they happened across found money. For an analogy, think of the guy digging a hole with a shovel who doesn't know when to stop. Why then don't economists en masse reject the stock market and moreover why don't they ever scream loudly and persistently about resource constraints?

digression: Personally, I have minimal sunk-costs in my bicycling equipment but will continue to deepen my hole, however gradually. My latest experiment involves the purchase of inner tubes of 4 times the thickness of ordinary road bike tubes. I will see if that helps reduce my predilection for flats. The typical research work trades non-recoverable sunk costs against the possibility of a profitable breakthrough to make it all worthwhile.

I would hazard a guess that the consideration of sunk-costs has to hit home first on a personal level, well before it becomes a global one. In that case, it will forever remain someone else's problem.

Sunk Costs = Digging a Hole + Not In My Backyard


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