Ignore Sunk Costs (2009)

https://seths.blog/2009/05/ignore-sunk-costs/

by vsrev • 7 years ago

149 95 7 years ago

seths.blog

therockspush• 7 years ago

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

projektfu• 7 years ago

This article has too many biases. What's needed is a prioritized list :) This is the tl/dr phenomenon...

happytoexplain• 7 years ago

I'm not sure it's fair to imply that the wikipedia article for a topic is equivalent in value to a blog post about that topic.

Finnucane• 7 years ago

True, the blog post probably has less value.

lubujackson• 7 years ago

Hold'em poker is specifically good at teaching this viscerally. Nothing lets you feel the mistake of valuing sunk costs than holding onto a once-strong starting hand way too long.

friedman23• 7 years ago

Yes, rather than making decisions due to past waste you need to make decisions that maximize expected value.

soniman• 7 years ago

What's called "entitlement tilt."

readhn4• 7 years ago

mistake is not in holding strong hand way too long. mistake is in not playing it.

chepaslaaa• 7 years ago

you get called and the flop is shit, what do you do?

dvt5• 7 years ago

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. Why? It’s reasonable to want to maintain plausible deniability about having suffered diachronic misfortune. Sometimes, honoring sunk costs is the only way to do this. It’s reasonable to want to maintain plausible deniability because having this desire is instrumental in successful cooperation, and successful cooperation is essential to our success as social creatures.

In Seth's concert example, this is particularly relevant: your spouse might be a huge Springsteen fan, for instance. She might have dressed up, and made a whole night of the event. Your friends might have also bought tickets and they are waiting for you. These are all technically "sunken costs" -- but not honoring them might hinder current (or future) cooperation.

[1] http://www.mit.edu/~rdoody/SunkCostFallacyIsNotaFallacy.pdf

defertoreptar• 7 years ago

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.

dvt5• 7 years ago

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 having no plans for the rest of the night, maybe in suffering a cooperation loss vis-a-vis the spouse, etc., they honor the sunken cost.

† I'd probably argue it's guaranteed.

DubiousPusher7• 7 years ago

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.

dvt5• 7 years ago

I think you're conflating what the paper author calls "binding" and "betting" -- "binding-type" decisions (like the one in the concert example) seem to be candidates for honoring sunken costs. Betting, on the other hand, does not.

baddox6• 7 years ago

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.

nullc3• 7 years ago

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 have made you good enough at it that your pay is good and your job stability is assured... and meanwhile you would have a hard time getting hired in a new preferred field or keeping a job there because your expected pay would be unaligned with your experience there (see also: ageism)... then that is just playing the hand you are currently holding.

Usually your current position isn't completely clear. You don't know precisely to what degree 20 years experience have made you better suited to your past field than another.

Under the reasonable assumption that your past costs weren't entirely wasted and aren't perfectly fungible to different moves it is reasonable to use your past costs as a predictor of your current position. 20 year experience in a field is probably worth something, and probably worth a lot more than 5 years.

dvt5• 7 years ago

This is a good point and it was going to make it in my original post!

I was going to say that the $1,000,000 price (as opposed to $100,000) tag on a piece of land will tend to be indicative of the value of the piece of land, assuming you weren't in a drunken stupor when you paid a million bucks for it. In other words, most decisions in life aren't bets made in a vacuum.

asperous• 7 years ago

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.

NewEntryHN2• 7 years ago

In this case you're merely using history to make a relevant choice about the future. You're not honoring the sunk cost because of the investment, you're just using the lessons your learnt while making this investment.

NewEntryHN2• 7 years ago

but not honoring them might hinder current (or future) cooperation.

Then you're not honoring sunk cost. You're honoring current or future costs, just like you should do.

Spooky23• 7 years ago

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.

anoother• 7 years ago

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.

robotresearcher• 7 years ago

Pissing off your spouse is a pertinent new cost of bailing from the concert, not a sunk cost. The ticket price is sunk, because you paid it in the past and can not change it.

jcriddle4• 7 years ago

If the ticket is fully refundable then it is also not a sunk cost. The land example also has potentially the same issue if the land can be sold for the purchase price. If the land can be sold but at a 20% discount then the sunk cost is only the 20%.

rumanator• 7 years ago

In Seth's concert example, this is particularly relevant: your spouse might be a huge Springsteen fan, for instance.

Your example misses the whole point of OP's demonstration of why sunk costs make no sense. OP's demonstration focuses on a single metric (cash), a single focused investment (time spent searching for the tickets) and a single critical change that exposes how the sunken cost fallacy negatively impacts decision-making (a random person offers you 10x the cash for your tickets).

The example illustrates that the amount of resources invested in the project in the past should not be a factor in the decision-making process because it leads to poor, irrational decisions. That's the core message of the sunken cost fallacy.

Your example fails to reproduce the problem because it switches the focus to an entirely different metric (utility) and frames the problem in a way that the new metric is actually negatively impacted by the change, thus the rationale decision is to not sell. That says nothing about the sunken cost fallacy because poor decisions are not alternatives to good decisions.

pdonis• 7 years ago

These are all technically "sunken costs"

No, they're not, they're additional factors to be considered in determining the value of the tickets to you, as compared to the value of the $500 you could get for them. The article ignores such factors, presumably for simplicity of exposition, but that doesn't mean they're not relevant. The correct rule is still to ignore sunk costs, because those are in the past; but the correct rule by no means says you should ignore relevant future impacts of your choice (like your spouse being upset because you sold the concert tickets) just because they aren't monetary.

manaskarekar• 7 years ago

Don't know if this was linked, but the relevant podcast episode if anyone's interested https://www.akimbo.link/blog/s-2-e-13-ignore-sunk-costs

thinkloop• 7 years ago

The most important decision-making rule you learn in business school is still largely misunderstood.

I wonder what he thinks is misunderstood. My experience is that people get it if taught it, and don't if they weren't.

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?

I get the message but this illustrates the trickiness of sunk costs, they're not always so perfectly sunk. In this case most people would probably correctly stay - they're there, dressed, ready to have a good time, a lot of the costs are only partially sunk with lots of residual value.

ghaff• 7 years ago

Yeah, I'm not sure I agree with that scenario.

Leave aside any ticket refunds or rescheduling--and assume you got the tickets for free but were offered the $500 from a scalper. If you really don't have any interest in staying I think most people would shrug and think "easy come, easy go" whether or not they theoretically had an option to turn the tickets into cash.

goldcd• 7 years ago

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 sunk $55+$200+$100 and if you sell your ticket, that's all list. You walk away with $145 profit - but you'd originally been prepared to see Bruce for twice that.

Maybe if you wait 30 mins the tout will put his price up? Or maybe somebody else will sell, he can deliver on his commitment to a third party, and resale price will collapse.

Now if the price collapses, you can still see Bruce. If they price offered remains/rises you can re-consider selling.

Now maybe you do take the money and exit the market.... Except article mentions Bruce is playing the next day. You could sink $100 into another night in the hotel and $50 to change your flight (which roughly halves your return). This would let you see if you can get another cheap ticket on stub-hub, and the next day sell them to touts, go to the show, stand outside trying to tout them yourself. When you spend that $150 then of-course the cost has been sunk and you should ignore it from then on. Problem is deciding whether or not to make the sunk-cost/investment.

redis_mlc• 7 years ago

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.

Thanks for articulating that so well.

It's easy to analyze sunk costs when actions can be considered in isolation academically. It's not at all the same situation when things are not so clean.

What if the concert was at CBGB, and it was closing the next day? What if you liked Streisand and it was possibly her last show? What if it was the last tour of KK Downing? Would any amount of money make selling your tickets worthwhile?

KK Downing demon-possessed and fully lit @4:26

https://www.youtube.com/watch?v=J4d5sMg8eCE

mikeryan3• 7 years ago

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.

turboturbo• 7 years ago

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

chiefalchemist• 7 years ago

Time is money. I think we'd also have to factor in the opportunity cost. You invested time in getting the tickets, which also denied you something else.

With regards to the tickets, I think the better question is: Will that ~$500 buy me an experience/memory as valuable as seeing Bruce? If, for example, the next thing on your bucket list is say $1500 then it's probably wise to stick with Bruce, and deal with what's next later.

dannypgh2• 7 years ago

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.

baddox6• 7 years ago

There’s also the much more basic concept of time preference. Regardless of the monetary costs of preparing for and traveling to the concert, the concert experience is going to be more valuable to you if it is set to occur in 5 minutes rather than in, say, 3 months.

It’s perfectly understandable and rational to value your ticket more 5 minutes before the concert starts than 3 months before it starts, just like you’ll pay more for almost anything if you get it now versus if you get it far in the future.

Time preference is a pretty basic Econ 101 concept. It’s why you get charged interest on loans.

kwhitefoot2• 7 years ago

Similar to the Concorde fallacy: https://dictionary.cambridge.org/us/dictionary/english/conco....

bsder• 7 years ago

While the Concorde may have been uneconomic, the engineer in me weeps at the loss of a little bit of coolness in the world.

kwhitefoot2• 7 years ago

the engineer in me weeps at the loss of a little bit of coolness

Me too!

franciscop• 7 years ago

I see code as a liability, and this is probably a very big part of it. So I regularly throw away large swats of code and whole projects when they are no longer useful and future prospects seem dire. I learned not to get attached to code.

But I've also seen other devs getting very attached to their code. So projects don't get closed, and instead they just fade in the background in a folder somewhere to avoid hurting anyone and keep the morale of the team up (which is very important of course). But this speaks a lot about technical debt and combinatory complexity of projects and companies, and I rarely see social discussed around technical debt.

I still don't know a good solution here. For my personal projects, I see things improving more and more and me being able to achieve results faster, so at least I'm very happy on that side.

Note: I'm not talking about my employer, just about companies in general.

paulpauper• 7 years ago

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 accidentally misspelled the person who made it should fix it at no extra cost.

He cannot even give good examples to support his thesis.

wtracy• 7 years ago

In the sign example, just imagine that the customer made the misspelling in the original order. The sign maker probably isn't going to throw in free services to fix the customer's mistake.

zelly3• 7 years ago

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

Yes, recognize survivorship bias when you see it.

stblack• 7 years ago

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/

austhrow743• 7 years ago

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

What does his publishing schedule have to do with anything? He's successful because he chose a time that's earlier in the day for your time zone than other bloggers do?

egypturnash2• 7 years ago

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

Real blog software* lets you schedule posts. It's eminently possible that he writes these in batches and has his blog post them at midnight local time. He seems to be using Wordpress, which has multiple plugins out there to make this even easier to do.

Regularly keeping this up for eleven years is nothing to sneeze at but I am pretty sure that the likelyhood of him getting up at 3AM every morning and writing a post is nil.

* yes this means your static site generator is not Real Blog Software

smarri• 7 years ago

This is how I was taught about sunk costs at business school. Which schools are largely misunderstanding it I wonder? Also, is this really the most important decision making rule? Even so - maybe it isn't so good, or practical, to ignore sunk costs. What if a business partner squandered your investment? Not to worry - just a sunk cost. Spent all those hours looking for the Springsteen tickets - maybe your time was more valuable than that $500 offer.

mikeryan3• 7 years ago

I came in to say that this was one of the tidbits of info I always held onto from business school. The whole point of understanding sunk costs is avoiding the Sunk Cost Fallacy.

Everytime I hear a sports talk radio guy talking about how much an overpaid and underperforming player is still going to play I pull my hair out.

https://www.behavioraleconomics.com/resources/mini-encyclope...

duxup• 7 years ago

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.

GuB-42• 7 years ago

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.

wrkronmiller• 7 years ago

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.

baddox6• 7 years ago

I think a simpler way of explaining that is simply to say that many people fail to recognize sunken costs because most costs are not sunken. It’s usually appropriate to consider past costs, and it takes effort and intention to recognize which costs are sunken.

readhn4• 7 years ago

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 before blowing out trading account completely. this plays out in the stock market every day and will continue for as long as trading exists. one cant ignore sunk costs - we have to learn from it.

vkat• 7 years ago

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

readhn4• 7 years ago

in the long run >95% of active retail traders loose money - bull market or not.

zelly3• 7 years ago

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.)

torstenvl• 7 years ago

It turns out the amount of time you spent getting the tickets is irrelevant. If you wouldn’t be willing to PAY $500 for these tickets (and you weren’t, or you would have) then you should be willing to sell them for $500.

This example has nothing to do with sunk costs and everything to do with WTP vs. WTA. Some people -- like the author, apparently -- think they are the same. Those people are wrong.

Ask yourself - gun to your head, right now, how much money would you offer to pay the man threatening you right now for him to go away? And what is the minimum you would accept from him, if offered, to let him blow your brains out? Chances are, the amount you would be willing to accept for X is much much higher than the amount you would be willing to pay for ~X.

Or, from a different approach, if your willingness to pay to go to the event and your willingness to accept to not go to an event were identical, then going or not-going would have to be a wash. That's obviously not true, or you wouldn't have put so much effort into going.

nine_k• 7 years ago

The amount you are willing to pay is limited by what's available to you.

The amount you agree to accept (and likely pass down to your inheritors) is basically unlimited.

sombremesa• 7 years ago

This is an interesting perspective to look at Bezos' "It's always day one".

punnerud• 7 years ago

Fun fact: In Norway it is not legal to sell tickets on the “black market” for more than what you paid for them.

FartyMcFarter• 7 years ago

The problem here is that sunk costs affect emotions, and humans are emotional beings. It's not all pure rationality.

It's all well and good to try and convince yourself that you made a rational decision against an emotional fallacy, but that doesn't always work.

ken• 7 years ago

Spend $250 on dinner and go buy better tickets for tomorrow night’s show.

Does he not understand how this works? Most touring musicians only play one night per city, e.g., [1]. It would cost me a lot more than $250 to follow Bruce from Seattle to NYC for his next show.

(He played every night On Broadway for a while but that was the exception.)

[1] https://brucespringsteen.net/shows/2016

harikb• 7 years ago

That one is the most idiotic advice I have seen. He said “seats” so he was clearly taking someone there - a friend or girl friend? I can only imagine driving back after selling the ticket would probably meant the dinner was alone.

dehrmann• 7 years ago

Well-meaning parents saying "eat what's on your plate, kids are starving in Japan" really reinforce valuing sunk costs. They also ignore that there's a global obesity epidemic.

zelly3• 7 years ago

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.

iamtheworstdev• 7 years ago

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

jagiammona• 7 years ago

Nick Szabo comes to a similar conclusion: http://unenumerated.blogspot.com/2012/08/proxy-measures-sunk...

BooneJS• 7 years ago

Work sunk costs: I can drop it, no problem.

Personal sink costs: I can’t do it. I know I should ignore it, but I cannot.

egypturnash2• 7 years ago

"Spend $250 on dinner and go buy better tickets for tomorrow night’s show."

Which you would probably have to spend another four hours looking for, if you could find any at all; Bruce is probably in town for a couple of days at most and tomorrow's show is most likely sold out. I guess your future time looking for those tickets is worth nothing too, despite the second paragraph urging you to only consider what may happen in the future when making a decision.

"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?"

Has this man ever gone to a concert in his entire life? The show's gonna be cancelled and you will be getting a refund.

Ignore Sunk Costs (2009)

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