WHY CAN’T YOU JUST GET IT THROUGH YOUR HEAD? IT’S A SUNK COST!!

Almost one year ago to the day, I wrote a post about what is known as the sunk cost fallacy.

The term sunk cost fallacy has been used by economists and behavioral scientists to describe the phenomenon where people justify increased investment of money, time, lives, etc. in a decision, based on the cumulative prior investment (“sunk costs”), despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit.

In my post from last year I offered some examples of this irrational decision making and suggested ways to avoid getting caught in such traps.

Well it seems as if none of the coaches in the National Football League read my original post.

Research conducted by Quinn A. W. Keefer at California State University San Marcos found that in the NFL, a player’s salary cap value (fixed for a given season, and so a major sunk cost to teams) affects his number of games started, even after controlling for performance. This effect remains even when teams get performance feedback and persists throughout an average player’s entire career, suggesting that the effect of compensation on playing time is being caused by the sunk-cost fallacy, not simply lack of data.

So in other words, coaches are making decisions about which players to put on the field based partially on what a player’s compensation is, and not just what their performance metrics would suggest their playing time should be.

As Keefer’s research notes, such compensation costs are sunk, and a rational decision maker should not include such costs in his decisions.

It’s not pure coincidence that I am writing about sunk costs again on just about the same date as last year, since it is usually about the second week of the semester that I cover such a topic in my class.

That was likely the motivation for last year’s post; the topic was fresh on my mind from having just taught it.

This year, as luck would have it, today’s Daily Stat from the Harvard Business Review was about Keefer’s research. So that gave me a chance to use a timely example of the sunk cost fallacy in a setting most of them could relate to.

It’s unfortunate that people continue to engage in such irrational decision making, but rest assured there are about 100 students per year graduating from Villanova Uuniversity who would never make such a mistake. Slowly but surely, the world is becoming a more rational place.

In the meantime, if any NFL team is looking for a sunk cost guru, I’m for hire.

My contract terms are pretty simple, you pay me a guaranteed annual fee.

If you don’t like my recommendations, I’ll tell you can let me go at any time and not to worry about any remaining fees you owe me, since they’re guaranteed anyway.

It’s a good lesson in sunk costs, and best of all, I get paid no matter what.

 

 

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Jim Borden

Accounting Prof. at Villanova; happily married for 30+ years; father of 3 outstanding young men; vegan; interests: fitness, creativity, education, blogging, social media.

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