2012/09/03

Again sunk costs

.
It is really, really astonishing how people come to power without having the slightest bit of immunity against one of the best known logical fallacies.

The former defence minister Joel Fitzgibbon, now government whip, said Australia was pursuing the right strategy. ''Every one of these incidents causes me to rethink our strategy but every time I rethink it, I come out with the same conclusion, which is that we cannot allow everything we've done to be in vain.''

source hat tip to ELP

It's incredible. No matter how much sweat and blood has been spilled already, this won't be changed by immediate withdrawal or permanent occupation. It's past. History. It's by definition impossible to change. No matter what course of action you choose for the future, those past costs appear on every possible course of action (or rather: They appear on none!).

Mathematically, you can delete them on both sides of every alternatives-comparing equation:

(past benefits and future benefits alternative A) minus
(past costs and future costs alternative A)
compared* with
(past benefits and future benefits alternative B) minus
(past costs and future costs alternative B)

is exactly the same* as

(future benefits alternative A) minus (future costs alternative A)
compared* with
(future benefits alternative B) minus (future costs alternative B)

Past benefits and costs do not influence whether alternative future course of action A or B is superior!

- - - - -

Past expenses are IRRELEVANT. People are irrational and don't get this easily, but it's a fact. DO NOT take into account what cannot be changed by your decision or does not have an effect on the outcome.

related:



I wish the media would check whether politicians are too stupid to get basic things such as fallacies right - and then expose the fools BEFORE the election. Instead, they fail to do so even after the fools behaved like fools. People die because of such failures!

S Ortmann

*: Difference, not quotient.

______________________________

edit: To clarify so everyone, absolutely everyone agrees who reads this:

I like cookies and think they're worth 1 €.
I flirt with a saleswoman and get one cookie for free.
Another cookie is left, price is 1.20 €.
Shall I buy it?

I would if I irrationally took into account irrelevant costs and benefits.
After all, I would count the cookie I already have as well, and 2 cookies for 1.20 €, average 0.60 €, would be fine.
It's nonsense to think so, though. 1.20 € for one cookie is overpriced.


Now switch, I'm the salesman now and I have already lost one cookie for free. The woman offers to buy the second one for 1.20 €.
Shall I sell it?

Of course, that's the damn price my boss says I shall demand!
It would be idiotic to not sell the second cookie unless the person is willing to pay 2.40 € for the second cookie. 1.20 €, 1.40 €, 2.39 € - these are prices that mean I'll make profit by selling the second cookie. There's no reason to demand 2.40 € minimum.
Sure, I can mourn the loss of giving away a cookie for free, that was probably a mistake. Shit happens, it's past. Probably my fault. Yet, my profit maximisation guideline from my boss is still to sell cookies for 1.20 € apiece, period.

National politicians are supposed to maximise the welfare of their nation. They don't if they fall prey to the sunk costs fallacy. Those who do fall prey to it are incompetent.
.

4 comments:

  1. Politicians don't have to worry about the actual costs. They worry about their credibility costs (where changing your mind bears a much higher cost than simply repeating the same old same old.) They can't say: "We redid the analysis and have changed our minds."

    Therefore, barring some catastrophic event, they are stuck in a rut (and drag countries behind them). The only practical way to change a policy is to change the politician.

    ReplyDelete
  2. Maybe the media doesn't understand this either and therefore can't point it out.

    Tim

    ReplyDelete
  3. Indeed a rational, economical mind would only take relevant information into account. But people are people, from your previous posts we can see you are a fan of coherency and building a force that won't shatter at first dip of morale. And yet in these posts we see little or nothing about those actually taking the losses and their continued will to serve and opinions about armed forces. These matters and need to be tackled, no matter if you stay or go.

    ReplyDelete
  4. " And yet in these posts we see little or nothing about those actually taking the losses and their continued will to serve and opinions about armed forces."

    I don't get what you mean.

    ReplyDelete