November 3, 2016

Sunk Costs and Politics

I was talking with an older gentleman the other day regarding the upcoming Presidential election and he made some comments regarding needing to vote for Donald because he had sat out the past several elections due to his distaste for the Republicans running for office.  The fact that Donald is an awful candidate was of less concern that a need to somehow redeem the fact that he had, in small part, allowed Obama to come into office.  As I was going to bed a couple days later, I realized that this was falling for the fallacy of sunk cost, a common fallacy in the business world that was discussed ad nauseam during my BA in Business Administration.  Thus, my next blog post was born.

What are sunk costs?

As I mentioned, “sunk cost” is a business and economics term, not often brought into the realm of voting and politics.  Therefore, I’ve borrowed heavily from Wikipedia to help define it for those without a strong business background:

In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs (also known as retrospective costs) are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.

In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that economic actors should not let sunk costs influence their decisions. Doing so would not be rationally assessing a decision exclusively on its own merits.

Evidence from behavioral economics suggests this theory fails to predict real-world behavior. Sunk costs do, in fact, influence actors' decisions because humans are prone to loss aversion and framing effects. In light of such cognitive quirks, it is unsurprising that people frequently fail to behave in ways that economists deem "rational".

Sunk costs should not affect the rational decision-maker's best choice. However, until a decision-maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making processes.

An example may help.  Say you buy non refundable airplane tickets to see your family.  A couple weeks go by.  You then find out that your favorite sports team is going to the World Series, the same week that you are supposed to go see your family, and you really want to go see the game.  Only one problem, the World Series is going to be in a different city than your family.  The natural inclination is to feel like the cost to go to the World Series instead of seeing your family is the sum of the following:

  1. The non-refundable money you spent for your tickets home
  2. The flight tickets to the World Series
  3. The tickets to the game
  4. The tickets to go see your parents some other time

In reality, the cost of the non-refundable tickets that you already purchased is a sunk cost.  You have already paid this cost and it has already been incurred whether you go to the game or go see your family.  The prospective cost to go to the World Series instead of seeing your family is only costs 2-4.  This would be accurately compared to a $0 prospective cost to go see your family (remember the flight cost is already sunk).

What Does is Have to Do With Politics?

OK, so hopefully you followed me so far, but now that you know what to do about your trip to your family or the World Series, you’re probably wondering, what the heck does this have to do with Hillary and Donald.  Glad you asked….

The gentleman I spoke of earlier has for the past couple elections not voted because he felt the the Republicans were so corrupt that it was better to sit out the election.  However, this year he feels bad that he’s allowed Obama to win 8 years in office and therefore he feels compelled to vote against Hillary.  When I stated that Donald was an awful candidate, way worse than McCain or Romney, this was of little consequence because he felt compelled to redeem the fact that he’d sat out the previous elections.  This falls exactly into the fallacy of sunk costs.  Whether this person votes for Donald, Hillary, Gary, or a write in…Obama still will have been in office for the past 8 years.  What’s happened…for better or worse…will still have happened.  The only election he can impact is the current one.

I Still Feel Awful About…

So, perhaps you can relate.  You didn’t vote, you feel like you voted for the wrong person, etc.  What are you to do?  It’s actually quite simple, vote for the person who you think is the best person to vote for in November 2016 based on the current situation at hand.  This is, after-all, the only thing you can actually impact.  Unfortunately, you can’t impact the 2008 or 2012 election anymore.  So, as the saying goes, don’t throw good money after bad.  Don’t do something this year because of what you did 4 years ago.  Do the best thing for today and for the future.  How you figure this out…is a more complicated matter for a different post.

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