USF economics prof Bruce Wydicki had a cogent piece in USA Yesterday relating the concept of sunk costs to America's involvement in Iraq. Although I do not dispute a word of his analysis I am delighted to pound the table in support of a related point not made by the prof. Here he goes:
Our inability to think clearly about sunk costs is impeding our ability to make clear decisions about our involvement in Iraq. Failing to correctly identify sunk costs (those that are irretrievable), and deal with them properly, biases our decision-making in favor of prolonging the war.
Maybe. Let's press on:
When I was a boy, my brother and I were captivated by a pseudo-gambling machine called Silver Falls at an arcade where we spent our summers in rural Missouri. The game works by directing a quarter along a chute so that it lands on a sliding shelf filled with other quarters. Aim correctly, and the falling quarter pushes a bunch of other quarters off the shelf and into the jackpot hole.
The game is exceptionally addictive, a fact that was obviously not lost on the arcade owners who installed the machine there. It seems that just plunking one more quarter in the machine will supply the necessary thrust to knock a huge pile of quarters off the shelf (some of which by now are your own quarters). Quitting means a loss of all the quarters that have been carefully invested in the game.
The inability to quit Silver Falls is related to a well-known idea in economics about sunk costs. As every student of economics knows, one should never take sunk costs into account when making a decision. They are sunk, and there is nothing you can do about them.
Identify what we've lost
It is clear that some of those who argue for extending the war in Iraq never learned about the importance of identifying sunk costs. Consider the following type of statement, the likes of which we have all heard many times: "A current withdrawal would dishonor the memory of those who have made the ultimate sacrifice for the sake of liberty." Whether one is for or against the war, is this a good way to think about whether we should press on?
I will skip a bit out of a vague and uncharacteristic respect for copyright and cut to his conclusion:
In the rhetoric of the difficult decisions over whether to extend our involvement in the war, including X as a cost of withdrawing inappropriately inflates the cost of a withdrawal. Just as it is harder to quit Silver Falls after wasting $10 worth of quarters, it is harder to quit a war after incurring 3,600 dead and tens of thousands wounded, and spending the better part of a trillion dollars in a failed effort.
Although it may seem callous, we need to forget about X in our decision-making about the war. The correct way to think about whether or not to proceed is to weigh the costs and benefits from pressing on from this point forward. What value do we place on victory? What are the chances that we will prevail if we do press on? And what will be the costs of pressing on in terms of lives and resources? Our country may be divided on this issue, but we owe it to those who may yet be called to make the ultimate sacrifice to properly count our costs.
To which I say, yes, but - is it only the war supporters that are befuddled about sunk costs vis a vis the importance of looking forward? Surely there are plenty of war opponents who argue, in effect, that Bush lied about WMDs, the war was launched without proper planning and international support, and therefore it is time to accept defeat and come home.
In the context of the Silver Falls metaphor, that would be akin to identifying the initial decision to commence dropping quarters into the game as a ghastly mistake that has now cost ten dollars, which will not be not coming back.
But suppose the next quarter has a fifty percent chance of shaking loose two dollars in change? That is an expected gross pay-off from the next quarter of one dollar, which implies that, however boneheaded the initial decision to commit ten dollars to the game, it really does behoove the player to continue a bit longer, even though the loss of ten dollars will not be fully redeemed.
That said, it would be well to carefully assess the objectivity and reliability of the person offering the evaluation of the next quarter drop - the fellow who has dropped the first forty might not be the most credible judge going forward.