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.


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