Results for “"sunk costs"” 17 found
Mice treat sunk costs as real
From Erica Goode at The New York Times:
In a study published on Thursday in the journal Science, investigators at the University of Minnesota reported that mice and rats were just as likely as humans to be influenced by sunk costs.
The more time they invested in waiting for a reward — in the case of the rodents, flavored pellets; in the case of the humans, entertaining videos — the less likely they were to quit the pursuit before the delay ended.
“Whatever is going on in the humans is also going on in the nonhuman animals,” said A. David Redish, a professor of neuroscience at the University of Minnesota and an author of the study.
Via Michelle Dawson, here is another study with a differing emphasis:
We found that the sunk cost effect was lower in the ASD [autism spectrum disorder] group than in the control group.
Here are previous MR posts on sunk costs.
When is it rational to honor sunk costs?
Alex offers up some biography and describes his encounter with sunk costs. He asks the classic question: why honor a cost once it is sunk? Why not just go ahead and do what is best?
Brian at CrookedTimber writes the following, citing a paper by philosopher Thomas Kelly:
The main idea (roughly stated) is that since the value of an action is partially determined by what happens in the future…our current actions can be sometimes justified by the redemptive value they confer on past actions.
What does this mean concretely? Here is one example from Kelly:
One might prefer that, if others have made significant sacrifices in attempting to realize some valuable state of affairs S, then their sacrifices not be in vain. That is, one might prefer that these sacrifices causally contribute to the realization of some valuable state of affairs…Interestingly, one sometimes is in a position to determine, by one’s own actions, whether the past efforts of others will have been in vain. This is true, for example, when it is within one’s power to finish some valuable project in whose service others have labored, but which they are now not in a position to complete. Let us say that when one acts so as to prevent the past efforts of others from having been in vain one redeems those efforts.
In other words, you don’t want to admit that you shouldn’t have started your blog. And how about this?
Gilbert Harman…observes that, so strong is our desire to see our own past efforts play a role in bringing about valuable ends, we will often adopt new ends, carefully tailored, so that our past efforts can be seen as instrumentally valuable means to the achievement of these ends.
Let’s not forget the game-theoretic rationale for honoring sunk costs: You might honor sunk costs so that others do not perceive you as wasteful, or so that others perceive you as constant and reliable. Robert Nozick argued that we follow through on sunk costs as a kind of self-discipline, to prevent ourselves from initiating too many stupid undertakings in the future. If you self-signal that you will follow through on your commitments, you will be more careful in accepting commitments in the first place.
By the way, I have found that women honor sunk costs to a greater degree than do men. Furthermore women often do not like it when men announce that something is “only” a sunk cost.
The bottom line: Once your model of choice is at all complex, no one knows what a sunk cost means any more. So a theoretical scolding of those who honor “sunk costs” is not completely well-defined. That being said, there is still the empirical question of whether most people attach too much weight to previous plans and have a status quo bias. The experimental evidence suggests that we are more rigid than we need to be. The propensity to honor previous commitments may have efficiency properties, but we cannot discard this proclivity when we ought to.
Theranos was Fraudulent, What About Its Patents?
In Launching the Innovation Renaissance I argued that patents should be given for specific inventions rather than just for broad “ideas”:
Thomas Edison invented and patented numerous products: the light bulb, the phonograph, movie film and much else besides. (At one point the patent office required that patents be accompanied by working models.) The invention of products typically requires the expenditure of sunk costs in a way that the creation of ideas does not. Today it is not necessary to implement an idea to patent it, and many patentable ideas are so broadly phrased that they could not be implemented in a model.
Edison famously said that “genius is one percent inspiration, ninety-nine percent perspiration.” A patent system should reward the 99 percent perspiration, not the 1 percent inspiration. In inventing the light bulb, for example, Edison laboriously experimented with some 6,000 possible materials for the filament before hitting upon bamboo. If Edison were to patent the light bulb today, he would not need to go to such lengths. Instead, Edison could patent the use of an “electrical resistor for the production of electro-magnetic radiation,” a patent that would have covered oven elements as well as light bulbs.
Daniel Nazer, who holds the Mark Cuban Chair to Eliminate Stupid Patents at the Electronic Frontier Foundation, points out in an excellent article that giving patents for vaguely stated ideas was exactly the problem with Theranos and its so-called patents.
Holmes found a more receptive audience at the USPTO. She says she spent five straight days at her computer drafting a patent application. The provisional application, filed in September 2003 when Holmes was just 19 years old, describes “medical devices and methods capable of real-time detection of biological activity and the controlled and localized release of appropriate therapeutic agents.” This provisional application would mature into many issued patents. In fact, there are patent applications still being prosecuted that claim priority back to Holmes’ 2003 submission.
But Holmes’ 2003 application was not a “real” invention in any meaningful sense. We know that Theranos spent years and hundreds of millions of dollars trying to develop working diagnostic devices. The tabletop machines Theranos focused on were much less ambitious than Holmes’ original vision of a patch. Indeed, it’s fair to say that Holmes’ first patent application was little more than aspirational science fiction written by an eager undergraduate.
…Two legal doctrines are relevant here. The “utility” requirement of patent law requires that the invention work. And the “enablement” requirement means that the application has to describe the invention with enough detail to allow a person in the relevant field to build and use it. If the applicant herself can’t build the invention with nearly unlimited time and money, it does not seem like the enablement requirement could possibly be satisfied.
The USPTO generally does a terrible job of ensuring that applications meet the utility and enablement standards.
Despite never having built a working product, Theranos accumulated hundreds of patents. These patents are now the only thing of value left but the patents aren’t valuable because of breakthrough science, the patents are valuable because they can be used to force people who do breakthrough science to cough up part of their return.
As Nazer puts it:
Accused of having lied to investors and endangered patients, the company leaves us with a parting gift: a portfolio of landmines for any company that actually solves the problems Theranos failed to solve.
The Interpersonal Sunk-Cost Effect
Christopher Olivola
Psychological Science, forthcomingAbstract:
The sunk-cost fallacy — pursuing an inferior alternative merely because we have previously invested significant, but nonrecoverable, resources in it — represents a striking violation of rational decision making. Whereas theoretical accounts and empirical examinations of the sunk-cost effect have generally been based on the assumption that it is a purely intrapersonal phenomenon (i.e., solely driven by one’s own past investments), the present research demonstrates that it is also an interpersonal effect (i.e., people will alter their choices in response to other people’s past investments). Across eight experiments (N = 6,076) covering diverse scenarios, I documented sunk-cost effects when the costs are borne by someone other than the decision maker. Moreover, the interpersonal sunk-cost effect is not moderated by social closeness or whether other people observe their sunk costs being “honored.” These findings uncover a previously undocumented bias, reveal that the sunk-cost effect is a much broader phenomenon than previously thought, and pose interesting challenges for existing accounts of this fascinating human tendency.
Wednesday assorted links
Floating exchange rates and tariffs
Not long ago I mentioned that a joint export subsidy and import tax would be offset by an appreciation of the real exchange rate. It’s worth pondering whether such results are the same for fixed and floating rates.
In the simplest model, the choice of exchange rate doesn’t matter. The real terms of trade adjust to the subsidy/tax mix under either regime, with the same final equilibrium.
That said, you might think that goods prices in international trade are nominally sticky in a way that exchange rates are not. Indeed you would be right, noting we don’t have a completely clear idea how much delivery lags and service quality changes sub in for some of (not all) the real price movements.
But there is a subtler difference as well. In a world of floating exchange rates, terms of trade move around more, in real terms, than if exchange rates were fixed. Call it noise, bubbles, or whatever, but sometimes nominal exchange rates have a “mind of their own,” and real exchange rates move much of the way with them.
For that reason, companies that engage in international trade have to be more robust to possible “taxes” — which include unfavorable exchange rate movements — than under the fixed rate regime. As a quick shorthand, I would say those companies need to have more market power to put up with the exchange rate volatility, though you can give the required corporate properties a few different twists, typically involving fixed costs, sunk costs, option values and the like rather than just market power in its simplest conception (it’s complicated.)
In other words, floating exchange rates, especially when there is a historical experience of ongoing real exchange rate volatility, will mean companies are more tariff-robust.
This is one reason why the Trump protectionist talk, while it is 110% bad, and bad for American foreign policy as well, and bad for uncertainty, and bad bad bad bad bad, and sometimes connected to bad bad bad people as well (did I say bad? It’s BAD!), won’t quite have the negative economic impact that many people think.
Think back to the mid-80s, when the USD went from 3.45 Deutschmarks to 1.7 Deutschmarks in what, less than two years’ time? That was the equivalent of a huge tax on Mercedes-Benz as an exporting firm. Did Mercedes like that? No. Did they manage? Well, mostly, sort of. Of course they had a fair amount of market power at the time, they would have less today.
A five percent tariff, relative to the built-in adjustments possible in light of changes in floating exchange rates, is for the most part manageable, at least on narrow economic grounds. Much of that five percent ends up as a tax on the monopoly profits of exporters. You can google and read up on “exchange rate pass-through.”
You will note that some of this argument draws on earlier research by Paul Krugman, though I am not suggesting he necessarily agrees with my application or interpretation; here are his recent remarks.
The foreign policy and presidential signaling and uncertainty-related issues, not the narrow economics, are still the main problem with a five or ten percent trade tax, and they are reason not to go down this route. But it is worth being clear on the economics. The oversimplified statement of the neglected insight here is “floating exchange movements tax trade all the time.”
What good is training in moral philosophy?
Eric Schwitzgebel and Fiery Cushman have an interesting paper (pdf, pubished Cognition version here) which raises that question rather directly:
We examined the effects of framing and order of presentation on professional philosophers’ judgments about a moral puzzle case (the “trolley problem”) and a version of the Tversky & Kahneman “Asian disease” scenario. Professional philosophers exhibited substantial framing effects and order effects, and were no less subject to such effects than was a comparison group of non-philosopher academic participants. Framing and order effects were not reduced by a forced delay during which participants were encouraged to consider “different variants of the scenario or different ways of describing the case”. Nor were framing and order effects lower among participants reporting familiarity with the trolley problem or with loss-aversion framing effects, nor among those reporting having had a stable opinion on the issues before participating the experiment, nor among those reporting expertise on the very issues in question. Thus, for these scenario types, neither framing effects nor order effects appear to be reduced even by high levels of academic expertise.
I wonder to what extent economists do better at treating sunk costs as sunk? The pointer is from Michelle Dawson.
By the way, ethicists are not more ethical. Just in case you were wondering. Are economists more economical?
Assorted links
1. Revisiting Chinese consumption.
2. As parents get more choice, San Francisco schools resegregate.
3. Is it good signaling if your finance minister looks like a normal person? And is there a better way to negotiate with terrorists?
4. Will new FCC rules kick 4.7 million households off-line? And who complains? (not me, actually)
5. Daniel Davies on Greek bargaining strategy. And claims about economics majors.
6. Overview of Haitian food, including spaghetti shakes.
Assorted links
1. Argentina’s President Kirchner adopts Jewish godson to prevent him from being turned into a werewolf. Before 2009, this privilege was restricted to Catholics only.
2. Barbie doll prices vary by job.
3. Are there too many “Best of” lists?
4. What is the “eyeball evidence” for the multiplier?
5. A prospective (and idiosyncratic) review of the AEA meetings.
6. Ezra Klein interviews Paul Krugman.
7. Many animals do not take sunk costs into account. And my 2012 column on Greece and the eurozone.
What I’ve been reading
1. Daniel Schreiber, Susan Sontag: A Biography. I never tire reading about her, or reading her, for that matter.
2. Richard Bernstein, China 1945: Mao’s Revolution and America’s Fateful Choice. A very good book on how the Americans had a decent relationship with the Chinese Communists in 1945 and how rapidly that fell apart and why.
3. Paul Vigna and Michael J. Casey, The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order. A good and useful introduction to the beliefs of those who believe in the subtitle being true.
4. Michael Pye, The Edge of the World: How the North Sea Made Us Who We Are. The topic is so intriguing to me that I’m going to start this book over again fresh. My first crack at it yielded no success, as I felt it was too much about Bede and Frisia and didn’t tie together a larger picture. But I paid extra shipping charges to get it early from the UK (it’s not yet out in America), so perhaps I am not treating sunk costs as sunk…
5. Pramoedya Ananta Toer, This Earth of Mankind, volume one of the Buru Quartet. These are the greatest books which most educated people never read, and I am giving them a reread. So far volume one is as good as I remember it, maybe better. I think of the set as an extended, four-volume meditation, by an Indonesian political prisoner, on what a life really consists of. Here is a short essay on the quartet.
Two unemployment puzzles
The first puzzle about unemployment when thought about from within the search-matching framework is that unemployment rates are highest among the least skilled and most homogeneous skills, i.e. among those worker/jobs with the easiest matches. It's hard to believe that it takes a year to match a construction worker to a job.
Closely related is the issue of how much uncertainty is holding back employment. The case for uncertainty is that hiring a worker is like exercising an option–once you hire, there are sunk costs of hiring (and potentially firing) that go beyond the wage such as administrative and training costs.
Note that you may not need a lot of uncertainty (i.e. you may not need regime uncertainty) to reduce hiring because you don't have to explain why firms aren't hiring only why they aren't hiring this day. Even if we assume, for example, that hiring would be profitable, all else equal, it doesn't take much uncertainty to make it worthwhile to delay hiring a little bit, to wait and see. It's precisely when sales are low and unemployment is high that firms don't mind waiting because uncertainty may resolve in due course and the workers aren't going away.
Ok, that's the positive case for uncertainty but the second puzzle is that uncertainty should matter most when hiring and firing costs are high and once again these costs are lowest for those workers with the greatest unemployment rates. It's one thing not to hire when you can't fire but when firing is easy what's the risk? Moreover, unemployment has increased more in the United States than in Europe even though hiring and firing costs are higher in Europe.
Search-matching models of unemployment have a lot to add but don't necessarily overthrow the importance of AD shocks, sticky wages and prices and other sources of unemployment.
Does studying economics make you happier?
Nikos Sp, a loyal MR reader, asks:
…ignoring the effect of becoming an economist
on your material welfare, do you believe that the economist’s mindset
is conducive to a happy life – or does a knowledge of economics lead to
a life of misery?
Nikos already has an answer, and yes he defends economics:
Here’s why:
1. I cherish my consumer surplus. I value most of the stuff I buy way more
than what I have to pay for them; vanilla ice cream makes me happy
beyond belief, and the same is true for the music of Dream Theater and
the (soon to be purchased) Apple iphone. And what am I asked to pay for them? Peanuts.2. I cherish my producer surplus. I am getting paid way, way more than the
salary that would make me indifferent between supplying labour and
staying at home.3. I never have regrets: I did the best I could given the information available to me at the time.
Judging I could have done better using information I acquired at a later date makes as much sense as regretting the existence of gravity. On a related topic, I understand the irrelevance of sunk costs.4. While I do care for my welfare in relative terms, my welfare in absolute terms looms large in my utility function – and, boy, look how its value has been growing.
5. The selfishness of my fellow human beings does not make me anxious or depressed. Adam Smith
(or was it Mandeville?) taught me that humans, selfish as they are, can make happy societies. And perhaps more to the point, they can make me happy.
Just think, consumer surplus from your consumer surplus. Only the fixed point theorem prevents him from reaching pure bliss. Most generally, (good) economics insulates people from expecting the impossible, and that does make for greater happiness and contentment. Do you all agree?
Amazon One-Click Patent Struck Down
The US patent office has ruled that enough prior art anticipated the one-click patent to rule a number of the major claims invalid. Perhaps we should chalk up another win to Eric Maskin!
I’m pleased that the Amazon patent was ruled invalid but insufficient attention to prior art is not the main problem with current patent law. Patent law needs to change so that patents would be ruled invalid or given much shorter lengths if they do not involve large, sunk costs.
Don Boudreaux reviews Inner Economist
Cowen shows that bygones should not be treated as bygones in all areas of life. When our self-image is at stake, past choices — costs that are irrevocable — often remain relevant for guiding our decisions today.
Here is the full review. Here is Alex on sunk costs. Here is Tyler on sunk costs, both posts date from the early days of MR.
Mall facts
1. At last count there were 1,175 large regional enclosed malls in the United States. Such malls account for about 14 percent of all U.S. retailing, or about $308 billion in sales.
2. The average mall customer spends 22 seconds looking at a mall map, and often leaves the map baffled.
3. The spaces near mall entrances typically yield lower rents and lower valued items. The shopper, upon entering the mall, is still disoriented and is not yet ready to buy something. That is why hair cutteries are so commonly found near mall entrances.
4. Men are more interested in people watching at malls, whereas women are more interested in shopping. Men also like the non-retail parts of malls, such as food courts, which do not require them to price shop or try on anything.
5. Bookstores have much higher “conversion rates” when they are outside of malls. Bookshops in malls are thought of as places to browse while waiting or marking time, but not places to buy books. Plus it is harder to bundle a mall bookshop with a cafe, which is often the most profitable place in the bookshop. For these reasons, bookshops are leaving malls in droves.
These assessments are from Paco Underhill’s new Call of the Mall. Underhill is arguably the leading expert in the anthropology of shopping, also read his views on selling real estate. This interview presents his views on web retailing.
How it is for me: To enjoy a mall trip, I need one fixed destination, combined with a firm plan to buy something. Add on a free hour to spare, and the desire to eat somewhere in the area or in the mall. The new Chipotle at Tysons Corner Mall is a big draw for me, since they have the freshest Mexican food in my rather sorry neighborhood. I would love a movie theatre at my mall but civilization in Northern Virginia is not yet so advanced. Beyond that, I want enough space in the mall to stretch my legs freely when walking. Given those preconditions, I will buy something for sure, once I have gone. Unlike Alex, I don’t treat sunk costs as sunk. Once I decide to do something I follow through, if only to discipline my choice of original commitments. That is how I make my highly rational, economically calculated, expected utility-maximizing shopping decisions.