Raising the Sunk Cost Falilacy

Raising the Sunk Costs Fallacy
James A. Montanye
Ask an academic economist whether sunk (i.e., irrecoverable) economic costs play a valid role in
decision making, and the reflexive answer will be, “No! Sunk costs are bygones. They’re water under
the bridge. Ignore them.” By contrast, a practicing political economist (regardless of pedigree) might
respond somewhat differently—a former Federal Communication Commission chief economist once
proposed “retrospective accountability” as a means for bringing bygones to justice.
The flawed belief that sunk costs are relevant for decision-making—dubbed the “sunk cost fallacy”—is
especially prevalent among non-economists. It often is invoked as justification for perpetuating failed
social programs and unwinnable wars. “If we stop now,” the argument goes, “then money already spent
and lives already lost will have been in vain.”
The distinguished biologist Richard Dawkins—in a 1976 article coauthored by a student, and (or so it is
claimed) without foreknowledge of economics’ sunk-cost fallacy—introduced a seemingly-related
concept dubbed the “Concorde fallacy.” The phrase presumably was chosen partly to disparage the
floundering Anglo-French supersonic airliner project. Dawkins explains, in Brief Candle in the Dark:
My Life in Science (2015, 78–79), that the plane’s costs “rose steeply during its development phase in
the 1970s so that it soon became uneconomical, but which British and French governments continued
to support to justify past investment.” Dawkins’ turn of phrase subsequently became synonymous in
common parlance with economics’ sunk-cost fallacy. It received widespread exposure among
biologists, and among behaviorists generally (the Oxford Dictionary of Psychology contains an entry
for it), but it is relatively unknown among economists.
The phrase itself arose in the course of analyzing a supposed “error” in natural selection that causes a
species of wasp to defend a burrow, “not on how much food is in the burrow but on how much she
herself has put there.” Besides describing this curious behavioral anomaly, Dawkins inadvertently
provided an unrecognized naturalistic, evolutionary basis for explaining the labor theory of economic
value, an unrelated fallacy within classical economics that flummoxed both Karl Marx and Adam Smith.
As a biologist, Dawkins routinely observed the effects of apparent economic efficiency at virtually every
level of nature: “Natural selection is a miserly economist, invisibly counting the pennies, the nuances of
cost and benefit too subtle for us, the observing scientists, to notice. ... unconscious calculations, as if
deliberately weighing up the costs and benefits.” Efficiency in this sense—which Dawkins famously
attributes to the metaphorically “selfish” propensity of genes to survive and flourish through natural
selection—is the consequence of unfettered competition for scarce economic resources. Dawkins’
insights in this regard have influenced significantly economists’ thinking about the nature of market
competition and spontaneous organization.
Nature in the raw does not indulge the sunk-cost fallacy—Dawkins attributes the fallacy to the
arbitrariness of human rationality. Natural selection sinks economic resources in the course of fitting
species randomly into ecological niches. When Nature’s experiments prove unsuccessful, or when
ecological circumstances change, highly specialized species become extinct—evolutionary biologists
estimate that upwards of 99 percent of all evolved species have come and gone in this way. Dawkins
notes that evolution isn’t intentionally cruel in this regard, merely indifferent.
To examine the validity and scope of Dawkins’ Concorde fallacy, first imagine a hypothetical project
whose benefit is estimated ex ante to be $10 billion, and its estimated cost estimated to be $8 billion.
By these measures, the project is justified. Now imagine that subsequent cost overruns push the
project’s total expenditure beyond the $10 billion benefit level. At what point does microeconomic
logic dictate that the project be abandoned?
Logic actually justifies the project’s continuation at every juncture so long as projected marginal benefits
exceed projected marginal costs, sunk costs being irrelevant to prospective decision-making. To
appreciate this point fully, assume that the project’s estimated benefit remains fixed at $10 billion.
Assume further that decision-makers presently are justly persuaded that the project can be completed
for an additional expenditure that is less than $10 billion. Decision-makers now face precisely the same
benefit/cost test as before; that is, a project that can be completed at a cost that is less than the
expected benefit. Funding therefore should continue, albeit perhaps under the aegis of a different
contractor. Total expenditures grow with each such iteration, but not because of fallacious economic
reasoning. Regrettably, sound economic reasoning by this example justifies cost overruns in perpetuity.
Continued funding of initially fatuous and presently failing endeavors often is justified on the basis of
sunk costs, as Dawkins alleges happened in Concorde’s case. However, continuation of the Concord
project also can be explained as an exercise in economic reasoning. The Concorde fallacy merely
shames and punishes (imposes “retrospective accountability” upon) decision-makers ex post by calling
attention to deceptively over-optimistic initial assumptions that are used routinely to justify foolish
projects.

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