One Shouldn't Worry About Sunk Costs, or One CAN'T Worry About Sunk Costs?
Kevin Quinn comments on this post as follows:
This is an interesting answer to the case I present, defending the notion that sunk costs are, in fact, irrelevant. But I think where this gets us is not to an admonition that we ought to ignore sunk costs, but to an a priori principle that sunk costs logically cannot be part of a decision process. In other words, in every case we can think of, of the sorts that occur in our textbooks, where economists are inclined to say, "That person is foolishly taking sunk costs into account," we could always re-describe the situation so that we can give a forward-looking reason for the decision. Someone says, "I have to go to the ball: I already paid for the tickets," we can say that what the person really is worried about here is the guilty feeling they will experience of having wasted the money, which is a forward-looking reason.
I don't think this is a crazy way to look at the situation. There is a real sense in which we could say that no one ever does worry about sunk costs, because even when they say they are, what is really worrying them is something like their future feelings of guilt. But if we take that approach, it makes no sense at all to admonish people not to worry about sunk costs. In fact, of necessity, they never do worry about them. In this understanding of sunk costs, such admonitions are like advising people, "Remember to obey the law of gravity when you go out today."
But I have no dogmatic position here. What is going on is that ever since teaching a unit on sunk costs to my micro one class last year, I have felt that there is something not quite copacetic in the standard handling of this subject. I am just trying to see my way through these difficulties.
I don't see this as a violation of the injunction to ignore sunk costs. If the child is forced to follow through, this is done, as you imagine, for the forward-looking reason that future costs will be lower - the fact that it has already been paid for has no bearing on the decision.
This is an interesting answer to the case I present, defending the notion that sunk costs are, in fact, irrelevant. But I think where this gets us is not to an admonition that we ought to ignore sunk costs, but to an a priori principle that sunk costs logically cannot be part of a decision process. In other words, in every case we can think of, of the sorts that occur in our textbooks, where economists are inclined to say, "That person is foolishly taking sunk costs into account," we could always re-describe the situation so that we can give a forward-looking reason for the decision. Someone says, "I have to go to the ball: I already paid for the tickets," we can say that what the person really is worried about here is the guilty feeling they will experience of having wasted the money, which is a forward-looking reason.
I don't think this is a crazy way to look at the situation. There is a real sense in which we could say that no one ever does worry about sunk costs, because even when they say they are, what is really worrying them is something like their future feelings of guilt. But if we take that approach, it makes no sense at all to admonish people not to worry about sunk costs. In fact, of necessity, they never do worry about them. In this understanding of sunk costs, such admonitions are like advising people, "Remember to obey the law of gravity when you go out today."
But I have no dogmatic position here. What is going on is that ever since teaching a unit on sunk costs to my micro one class last year, I have felt that there is something not quite copacetic in the standard handling of this subject. I am just trying to see my way through these difficulties.
What is going on is that ever since teaching a unit on sunk costs to my micro one class last year...
ReplyDeleteNow I'm insulted! I brought up this very issue when someone in the NYU colloquium presented a paper on it. I used the example of someone who forces himself to eat a spicy dish at a restaurant, even though he hates it, to make sure he is more careful in the future when ordering.
But maybe you weren't at that one, or maybe I didn't make my position clear.
I don't think I was there that day.
DeleteGene: I think sunk costs can matter and that it's certainly not tautological to say that we ignore sunk costs. It's just that your example lends itself too easily to being re-described in consequentialist terms. Here is an example from Elizabeth Anderson that is more resistant to such re-description (I'm using something from a paper of mine):
ReplyDeleteElizabeth Anderson emphasizes this important implication a concern with narrative unity. She describes (1993: 34) a couple who have established over a lifetime a successful family restaurant, contemplating selling it to a big chain and deciding not to sell because it would leave them with life-stories as successful sell-outs. She says: "Consequentialists view the couple's reasoning as irrationally weighing sunk costs in their calculations. If a greater amount of future good can be achieved by taking up an entirely new path than it could by sticking with one's past commitments and personal investments, one should disregard the past and take the option with the greater future pay-off. If having alternatives to mass-produced commercialism in restaurants is a good thing, this consideration counts in a calculation of future good, but....should count no differently for a couple who had devoted their lives to promoting it than for a couple who judge that it is as good as the devotees say, but who had just come into the restaurant by inheritance. The meanings a choice confers on one's past actions are irrelevant to the future payoffs, which are by hypothesis the same in either case."(Op. cit.: 35)
(The reference is to Anderson's *Value in Ethics and Economics*, Harvard University Press, 1993)
"it would leave them with life-stories as successful sell-outs."
DeleteForward-looking reason. Very easy to re-describe!