Last Monday, I was fourth in a line-up of cars outside a NYC parking lot.
Unable to decide if I should stay or look elsewhere, I knew that an economist had the answer.
Tough Decisions
At the parking lot, I thought to myself that because I had been in line for 15 minutes, I should not leave and try to find another place to park. Similarly, after having read a boring book for several hours, it’s tough fior me to stop.
My parking and reading dilemmas are similar to the decisions that governments and business contemplate.
The cost of California’s bullet train, connecting five of the state’s 10 largest cities, continues to exceed projections. Initially estimated at $33 billion, now the project, will more likely run a whopping $113 billion. As of now, they are working on a 171 mile starter leg.
The route of the train is the black line. A second phase is in gray:
With the debate about the train project continuing, some feel the past investment is propelling them to continue.
As potentially comparable examples, USA Today had a list of products for which people had to decide whether or not to persevere. The list includes Ford’s Edsel and Google Glass. Also, I could not believe that Frito Lay tried to sell us Cheetos lip balm. And while we associate Apple only with winners, remember the Newton? And of course there was New Coke–the campaign from Coca-Cola to replace the original Cola recipe we all knew and loved by a sweeter drink that could better compete against Pepsi.
Our Bottom Line: Sunk Costs
Whether looking at a parking lot, a fast train, or lip balm, the attraction of a past investment is a key consideration. Called a sunk cost, a past investment of time and money is unrecoverable. Although sunk costs are gone, they still tend to influence a future decision.
Economists say the value of sunk costs is a fallacy. Instead, we should focus on future cost and benefit.
My soiurces and more: The USA Today product flop article was a good read. Next, for more on the California high speed train, the facts are here and here.
There is no question that the sunk cost fallacy is a true fallacy. But the parking decision not a question of sunk cost, but of complete initial ignorance of the relative delays at each parking line. Time spent does nothing to dispel that ignorance of initial prospective delays, but does represent an investment that could as easily be needed at any line, That investment is dissipated by a switch (this assumes that parking somewhere is required).
The sunk cost fallacy undoubtedly contributes to the impetus to extend the high-speed rail line, but at least as important are lobbying pressures and willful ignorance of the true cost of maintenance and of the possibility of integrating much cheaper bus connections.
Respectfully, Rick, I disagree. We had parked in the lot before and had no delays. This time, trying to decide if we should leave because of the accumulating wait time, we were dissuaded (wisely it turned out) by our sunk cost.
You were wisely dissuaded by a fallacy; but logical analysis of the implications of unchanged initial ignorance would have led to the same conclusion. Similar analysis of unchanged initial ignorance leads to the opposite conclusion (switching) in the Monty Hall problem.
Thanks Rick!