> 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.
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.
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.
In most realistic scenarios your estimations of the payoff matrix has a significant uncertainty. It isn't just that there is risk, but your estimation of the risk is uncertain as well (as well as your estimation of your estimation, and so on).
When reasoning under uncertainty we can usually achieve significant benefits from regularizing the decision.
"Do what everyone else is doing", "Keep doing what I was already doing", and "Do what is most consistent with my past investments" are time tested highly effective regularizers. When we are trying to rationalize taking actions that defy billions of years of evolved heuristics for reasoning under uncertainty we call the first 'bandwagon fallacy', the second 'status quo bias', and the third 'sunk cost fallacy'.
There is often a fine line between rational decision making and rationalization. Awareness of the ways that people sometimes make errors in their decisions can be useful, but one should take care to avoid using a little bit of knowledge to come up with specious justifications for poor choices.
Much of the time I see the word 'fallacy' used it sure seems to be sophistry. When a reasoned position is better you can just state why its better outright and the justification will stand up on its own merit without any invocation of a named fallacy.
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.
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.
Buying land isn't like betting on black. Land has a history, markets are (more or less) efficient, and buyers are usually rational. The sunken cost fallacy suggests the answer is a coin-toss, but in the real world, the correct answer would (usually) be the expensive plot.
The fact that someone (perhaps yourself) valued a property highly recently is correlated with that property having a high present value. But it does not cause it.
It is possible the million dollar purchase was a mistake, or that something has changed and it's now worth far less. Valuing a property highly may cause you to have paid a lot of money for it, and that might be a reason to assess the current value highly. But that's very, very different from valuing a properly highly because you paid a lot of money for it.
That's exactly what honoring sunk costs mean. Making the investment means the cost factor. And using the lessons your learnt means honoring.
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.
If it helps you to think in sunk costs that's probably fine. I don't care. My point was purely that one can incorporate the kinds of concerns the OP was proposing without rejecting the "sunk cost falacy".
an event occurs (buy ticket) at tX. according to "ignore sunk costs", at tX+delta you should annihilate all influence from any event at tX or before. therefore that you have a concert ticket is, in a weird way, almost immaterial. it enables a future decision (to "freely" go to a concert, as you would any other activity) but, my interpretation is that you only have present and future after every instant moment.
you may say: well what about eliminating future opportunities? e.g. i spent my last $250 on concert ticket so can't go to hawaii. that is in part of a matrix i would call "regret" or counterfactuals (not sure if there's an economic/scientific term here), which involves thinking about how past decisions affected future ones.
You don't need to think in sunk cost terms to value plausible deniability. You should view losing credibility with your superiors and peers as a current cost that runs into the future.
If for example you suddenly realize your thesis paper is junk and are faced with decision to push forward or start anew it's not sunk cost to consider that your academic superiors might see this as flailing about and that you should count that as a cost of changing direction. That's just a social cost and not a time or materials cost.
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.
This is a similar mistake to failing to price other intangibles like risk.
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.
I'm monetary terms, you got the exact same outcome as if you'd have sold the tickets.
Then you're not honoring sunk cost. You're honoring current or future costs, just like you should do.
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.
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.
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.
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
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.
It turns out the amount of time you spent getting the tickets is irrelevant.
No its not my time is worth something. 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.
 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.
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.
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.
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.
>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.
Yes, recognize survivorship bias when you see it.
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/
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
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?
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.
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.
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.
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.
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.
Does he not understand how this works? Most touring musicians only play one night per city, e.g., . 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.)
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.
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.
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.
The amount you agree to accept (and likely pass down to your inheritors) is basically unlimited.
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.
Personal sink costs: I can’t do it. I know I should ignore it, but I cannot.
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.
This one is the Irrational escalation or Escalation of commitment/Sunk Cost Fallacy.
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.
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.)