Friday, August 06, 2010

Resolution 242 - discounting sunk costs

When I was new, one of my hobbies was visiting cults. The recruiters loved me; I suppose I had a credulous face. It was a surprisingly educational hobby, but these days the cults are suspicious. My face is worn.

Now my hobby is self engineering. Resolution 242 is to discount sunk costs in everyday life ...
... In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered....
In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that an economic actor not let sunk costs influence one's decisions, because doing so would not be rationally assessing a decision exclusively on its own merits....

Evidence from behavioral economics suggests this theory fails to predict real-world behavior. Sunk costs greatly affect actors' decisions, because humans are inherently loss-averse and thus normally act irrationally when making economic decisions.

Sunk costs should not affect the rational decision-maker's best choice...
If you look for sunk costs, you will find them.

When I make a wrong turn, I value the time I've lost. I try to find a route that will conserve it. I ought to discount my lost time and turn around, and take the shorter route. I prefer Pepsi to Coke, but I like the first half of a can of Diet Coke. I don't like the last half, I should throw it out. If my food is no longer tasty, I should throw it away (the calories, in my world, are a harm, not a benefit).

And, of course, there are all the sunk costs of corporate strategies, of long campaigns, of hours of argument. Costs that are very hard to ignore when times change.

With a little bit of practice I'm finding it fairly easy to discount sunk costs in everyday life. Against the pain of turning the car around, I have the satisfaction of defeating nature's programming.

It feels to me like the practice scales. Throwing away a snack when it stops being delicious seems to make it easier to discard obsolete strategies.

Discounting sunk costs is indeed a useful discipline.

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