sunk cost fallacy

A new direction

PNRJ personal, science and academia , , , , , , , , , , , ,

Dec 31 JDN 2460311

CW: Spiders [it’ll make sense in context]

My time at the University of Edinburgh is officially over. For me it was a surprisingly gradual transition: Because of the holiday break, I had already turned in my laptop and ID badge over a week ago, and because my medical leave, I hadn’t really done much actual work for quite some time. But this is still a momentous final deadline; it’s really, truly, finally over.

I now know with some certainty that leaving Edinburgh early was the right choice, and if anything I should have left sooner or never taken the job in the first place. (It seems I am like Randall Munroe after all.) But what I don’t know is where to go next.

We won’t be starving or homeless. My husband still has his freelance work, and my mother has graciously offered to let us stay in her spare room for awhile. We have some savings to draw upon. Our income will be low enough that payments on my student loans will be frozen. We’ll be able to get by, even if I can’t find work for awhile. But I certainly don’t want to live like that forever.

I’ve been trying to come up with ideas for new career paths, including ones I would never have considered before. Right now I am considering: Back into academia (but much choosier about what sort of school and position), into government or an international aid agency, re-training to work in software development, doing my own freelance writing (then I must decide: fiction or nonfiction? Commercial publishing, or self-published?), publishing our own tabletop games (we have one almost ready for crowdfunding, and another that I could probably finish relatively quickly), opening a game shop or escape room, or even just being a stay-at-home parent (surely the hardest to achieve financially; and while on the one hand it seems like an awful waste of a PhD, on the other hand it would really prove once and for all that I do understand the sunk cost fallacy, and therefore be a sign of my ultimate devotion to behavioral economics). The one mainstream option for an econ PhD that I’m not seriously considering is the private sector: If academia was this soul-sucking, I’m not sure I could survive corporate America.

Maybe none of these are yet the right answer. Or maybe some combination is.

What I’m really feeling right now is a deep uncertainty.

Also, fear. Fear of the unknown. Fear of failure. Fear of rejection. Almost any path I could take involves rejection—though of different kinds, and surely some more than others.

I’ve always been deeply and intensely affected by rejection. Some of it comes from formative experiences I had as a child and a teenager; some of it may simply be innate, the rejection-sensitive dysphoria that often comes with ADHD (which I now believe I have, perhaps mildly). (Come to think of it, even those formative experiences may have hit so hard because of my innate predisposition.)

But wherever it comes from, my intense fear of rejection is probably my greatest career obstacle. In today’s economy, just applying for a job—any job—requires bearing dozens of rejections. Openings get hundreds of applicants, so even being fully qualified is no guarantee of anything.

This makes it far more debilitating than most other kinds of irrational fear. I am also hematophobic, but that doesn’t really get in my way all that much; in the normal course of life, one generally tries to avoid bleeding anyway. (Now that MSM can donate blood, it does prevent me from doing that; and I do feel a little bad about that, since there have been blood shortages recently.)

But rejection phobia basically feels like this:

Imagine you are severely arachnophobic, just absolutely terrified of spiders. You are afraid to touch them, afraid to look at them, afraid to be near them, afraid to even think about them too much. (Given how common it is, you may not even have to imagine.)

Now, imagine (perhaps not too vividly, if you are genuinely arachnophobic!) that every job, every job, in every industry, regardless of what skills are required or what the work entails, requires you to first walk through a long hallway which is covered from floor to ceiling in live spiders. This is simply a condition of employment in our society: Everyone must be able to walk through the hallway full of spiders. Some jobs have longer hallways than others, some have more or less aggressive spiders, and almost none of the spiders are genuinely dangerous; but every job, everywhere, requires passing through a hallway of spiders.

That’s basically how I feel right now.

Freelance writing is the most obvious example—we could say this is an especially long hallway with especially large and aggressive spiders. To succeed as a freelance writer requires continually submitting work you have put your heart and soul into, and receiving in response curtly-worded form rejection letters over and over and over, every single time. And even once your work is successful, there will always be critics to deal with.

Yet even a more conventional job, say in academia or government, requires submitting dozens of applications and getting rejected dozens of times. Sometimes it’s also a curt form letter; other times, you make it all the way through multiple rounds of in-depth interviews and still get turned down. The latter honestly stings a lot more than the former, even though it’s in some sense a sign of your competence: they wouldn’t have taken you that far if you were unqualified; they just think they found someone better. (Did they actually? Who knows?) But investing all that effort for zero reward feels devastating.

The other extreme might be becoming a stay-at-home parent. There aren’t as many spiders in this hallway. While biological children aren’t really an option for us, foster agencies really can’t afford to be choosy. Since we don’t have any obvious major red flags, we will probably be able to adopt if we choose to—there will be bureaucratic red tape, no doubt, but not repeated rejections. But there is one very big rejection—one single, genuinely dangerous spider that lurks in a dark corner of the hallway: What if I am rejected by the child? What if they don’t want me as their parent?

Another alternative is starting a business—such as selling our own games, or opening an escape room. Even self-publishing has more of this character than traditional freelance writing. The only direct, explicit sort of rejection we’d have to worry about there is small business loans; and actually with my PhD and our good credit, we could reasonably expect to get accepted sooner or later. But there is a subtler kind of rejection: What if the market doesn’t want us? What if the sort of games or books (or escape experiences, or whatever) we have to offer just aren’t what the world seems to want? Most startup businesses fail quickly; why should ours be any different? (I wonder if I’d be able to get a small business loan on the grounds that I forecasted only a 50% chance of failing in the first year, instead of the baseline 80%. Somehow, I suspect not.)

I keep searching for a career option with no threat of rejection, and it just… doesn’t seem to exist. The best I can come up with is going off the grid and living as hermits in the woods somewhere. (This sounds pretty miserable for totally different reasons—as well as being an awful, frankly unconscionable waste of my talents.) As long as I continue to live within human society and try to contribute to the world, rejection will rear its ugly head.

Ultimately, I think my only real option is to find a way to cope with rejection—or certain forms of rejection. The hallways full of spiders aren’t going away. I have to find a way to walk through them.

Revealed preference: Does the fact that I did it mean I preferred it?

PNRJ critique of neoclassical economics, heuristics and biases , , , , , , ,

Post 312 Oct 27 JDN 2458784

One of the most basic axioms of neoclassical economics is revealed preference: Because we cannot observe preferences directly, we infer them from actions. Whatever you chose must be what you preferred.

Stated so badly, this is obviously not true: We often make decisions that we later come to regret. We may choose under duress, or confusion; we may lack necessary information. We change our minds.

And there really do seem to be economists who use it in this bald way: From the fact that a particular outcome occurred in a free market, they will infer that it must be optimally efficient. (“Freshwater” economists who are dubious of any intervention into markets seem to be most guilty of this.) In the most extreme form, this account would have us believe that people who trip and fall do so on purpose.

I doubt anyone believes that particular version—but there do seem to be people who believe that unemployment is the result of people voluntarily choosing not to work, and revealed preference has also led economists down some strange paths when trying to explain what sure looks like irrational behavior—such as “rational addiction” theory, positing that someone can absolutely become addicted to alcohol or heroin and end up ruining their life all based on completely rational, forward-thinking decision planning.

The theory can be adapted to deal with these issues, by specifying that it’s only choices made with full information and all of our faculties intact that count as revealing our preferences.

But when are we ever in such circumstances? When do we ever really have all the information we need in order to make a rational decision? Just what constitutes intact faculties? No one is perfectly rational—so how rational must we be in order for our decisions to count as revealing our preferences?

Revealed preference theory also quickly becomes tautologous: Why do we choose to do things? Because we prefer them. What do we prefer? What we choose to do. Without some independent account of what our preferences are, we can’t really predict behavior this way.

A standard counter-argument to this is that revealed preference theory imposes certain constraints of consistency and transitivity, so it is not utterly vacuous. The problem with this answer is that human beings don’t obey those constraints. The Allais Paradox, the Ellsberg Paradox, the sunk cost fallacy. It’s even possible to use these inconsistencies to create “money pumps” that will cause people to systematically give you money; this has been done in experiments. While real-world violations seem to be small, they’re definitely present. So insofar as your theory is testable, it’s false.

The good news is that we really don’t need revealed preference theory. We already have ways of telling what human beings prefer that are considerably richer than simply observing what they choose in various scenarios. One very simple but surprisingly powerful method is to ask. In general, if you ask people what they want and they have no reason to distrust you, they will in fact tell you what they want.

We also have our own introspection, as well as our knowledge about millions of years of evolutionary history that shaped our brains. We don’t expect a lot of people to prefer suffering, for instance (even masochists, who might be said to ‘prefer pain’, seem to be experiencing that pain rather differently than the rest of us would). We generally expect that people will prefer to stay alive rather than die. Some may prefer chocolate, others vanilla; but few prefer motor oil. Our preferences may vary, but they do follow consistent patterns; they are not utterly arbitrary and inscrutable.

There is a deeper problem that any account of human desires must face, however: Sometimes we are actually wrong about our own desires. Affective forecasting, the prediction of our own future mental states, is astonishingly unreliable. People often wildly overestimate the emotional effects of both positive and negative outcomes. (Interestingly, people with depression tend not to do this—those with severe depression often underestimate the emotional effects of positive outcomes, while those with mild depression seem to be some of the most accurate forecasters, an example of the depressive realism effect.)

There may be no simple solution to this problem. Human existence is complicated; we spend large portions of our lives trying to figure out what it is we really want.
This means that we should not simply trust that whatever it is happens is what everyone—or even necessarily anyone—wants to happen. People make mistakes, even large, systematic, repeated mistakes. Sometimes what happens is just bad, and we should be trying to change it. Indeed, sometimes people need to be protected from their own bad decisions.

The sunk-cost fallacy

PNRJ heuristics and biases , , , , , , , , , , , , ,

JDN 2457075 EST 14:46.

I am back on Eastern Time once again, because we just finished our 3600-km road trek from Long Beach to Ann Arbor. I seem to move an awful lot; this makes me a bit like Schumpeter, who moved an average of every two years his whole adult life. Schumpeter and I have much in common, in fact, though I have no particular interest in horses.

Today’s topic is the sunk-cost fallacy, which was particularly salient as I had to box up all my things for the move. There were many items that I ended up having to throw away because it wasn’t worth moving them—but this was always painful, because I couldn’t help but think of all the work or money I had put into them. I threw away craft projects I had spent hours working on and collections of bottlecaps I had gathered over years—because I couldn’t think of when I’d use them, and ultimately the question isn’t how hard they were to make in the past, it’s what they’ll be useful for in the future. But each time it hurt, like I was giving up a little part of myself.

That’s the sunk-cost fallacy in a nutshell: Instead of considering whether it will be useful to us later and thus worth having around, we naturally tend to consider the effort that went into getting it. Instead of making our decisions based on the future, we make them based on the past.

Come to think of it, the entire Marxist labor theory of value is basically one gigantic sunk-cost fallacy: Instead of caring about the usefulness of a product—the mainstream utility theory of value—we are supposed to care about the labor that went into making it. To see why this is wrong, imagine someone spends 10,000 hours carving meaningless symbols into a rock, and someone else spends 10 minutes working with chemicals but somehow figures out how to cure pancreatic cancer. Which one would you pay more for—particularly if you had pancreatic cancer?

This is one of the most common irrational behaviors humans do, and it’s worth considering why that might be. Most people commit the sunk-cost fallacy on a daily basis, and even those of us who are aware of it will still fall into it if we aren’t careful.

This often seems to come from a fear of being wasteful; I don’t know of any data on this, but my hunch is that the more environmentalist you are, the more often you tend to run into the sunk-cost fallacy. You feel particularly bad wasting things when you are conscious of the damage that waste does to our planetary ecosystem. (Which is not to say that you should not be environmentalist; on the contrary, most of us should be a great deal more environmentalist than we are. The negative externalities of environmental degradation are almost unimaginably enormous—climate change already kills 150,000 people every year and is projected to kill tens if not hundreds of millions people over the 21st century.)

I think sunk-cost fallacy is involved in a lot of labor regulations as well. Most countries have employment protection legislation that makes it difficult to fire people for various reasons, ranging from the basically reasonable (discrimination against women and racial minorities) to the totally absurd (in some countries you can’t even fire people for being incompetent). These sorts of regulations are often quite popular, because people really don’t like the idea of losing their jobs. When faced with the possibility of losing your job, you should be thinking about what your future options are; but many people spend a lot of time thinking about the past effort they put into this one. I think there is also some endowment effect and loss aversion at work as well: You value your job more simply because you already have it, so you don’t want to lose it even for something better.

Yet these regulations are widely regarded by economists as inefficient; and for once I am inclined to agree. While I certainly don’t want people being fired frivolously or for discriminatory reasons, sometimes companies really do need to lay off workers because there simply isn’t enough demand for their products. When a factory closes down, we think about the jobs that are lost—but we don’t think about the better jobs they can now do instead.

I favor a system like what they have in Denmark (I’m popularizing a hashtag about this sort of thing: #Scandinaviaisbetter): We don’t try to protect your job, we try to protect you. Instead of regulations that make it hard to fire people, Denmark has a generous unemployment insurance system, strong social welfare policies, and active labor market policies that help people retrain and find new and better jobs. One thing I think Denmark might want to consider is restrictions on cyclical layoffs—in a recession there is pressure to lay off workers, but that can create a vicious cycle that makes recessions worse. Denmark was hit considerably harder by the Great Recession than France, for example; where France’s unemployment rose from 7.5% to 9.6%, Denmark’s rose from an astonishing 3.1% all the way up to 7.6%.

Then again, sometimes what looks like a sunk-cost fallacy actually isn’t—and I think this gives us insight into how we might have evolved such an apparently silly heuristic in the first place.

Why would you care about what you did in the past when deciding what to do in the future? Well there’s one reason in particular: Credible commitment. There are many cases in life where you’d like to be able to plan to do something in the future, but when the time comes to actually do it you’ll be tempted not to follow through.

This sort of thing happens all the time: When you take out a loan, you plan to pay it back—but when you need to actually make payments it sure would be nice if you didn’t have to. If you’re trying to slim down, you go on a diet—but doesn’t that cookie look delicious? You know you should quit smoking for your health—but what’s one more cigarette, really? When you get married, you promise to be faithful—but then sometimes someone else comes along who seems so enticing! Your term paper is due in two weeks, so you really should get working on it—but your friends are going out for drinks tonight, why not start the paper tomorrow?

Our true long-term interests are often misaligned with our short-term temptations. This often happens because of hyperbolic discounting, which is a bit technical; but the basic idea is that you tend to rate the importance of an event in inverse proportion to its distance in time. That turns out to be irrational, because as you get closer to the event, your valuations will change disproportionately. The optimal rational choice would be exponential discounting, where you value each successive moment a fixed percentage less than the last—since that percentage doesn’t change, your valuations will always stay in line with one another. But basically nobody really uses exponential discounting in real life.

We can see this vividly in experiments: If we ask people whether they would you rather receive $100 today, or $110 a week from now, they often go with $100 today. But if you ask them whether they would rather receive $100 in 52 weeks or $110 in 53 weeks, almost everyone chooses the $110. The value of a week apparently depends on how far away it is! (The $110 is clearly the rational choice by the way. Discounting 10% per week makes no sense at all—unless you literally believe that $1,000 today is as good as $140,000 a year from now.)

To solve this problem, it can be advantageous to make commitments—either enforced by direct measures such as legal penalties, or even simply by making promises that we feel guilty breaking. That’s why cold turkey is often the most effective way to quit a drug. Physiologically that makes no sense, because gradual cessation clearly does reduce withdrawal symptoms. But psychologically it does, because cold turkey allows you to make a hardline commitment to never again touch the stuff. The majority of successful smokers report using cold turkey, though there is still ongoing research on whether properly-orchestrated gradual reduction can be more effective. Likewise, vague notions like “I’ll eat better and exercise more” are virtually useless, while specific prescriptions like “I will do 20 minutes of exercise every day and stop eating red meat” are much more effective—the latter allows you to make a promise to yourself that can be broken, and since you feel bad breaking it you are motivated to keep it.

In the presence of such commitments, the past does matter, at least insofar as you made commitments to yourself or others in the past. If you promised never to smoke another cigarette, or never to cheat on your wife, or never to eat meat again, you actually have a good reason—and a good chance—to never do those things. This is easy to confuse with a sunk cost; when you think about the 20 years you’ve been married or the 10 years you’ve been vegetarian, you might be thinking of the sunk cost you’ve incurred over that time, or you might be thinking of the promises you’ve made and kept to yourself and others. In the former case you are irrationally committing a sunk-cost fallacy; in the latter you are rationally upholding a credible commitment.

This is most likely why we evolved in such a way as to commit sunk-cost fallacies. The ability to enforce commitments on ourselves and others was so important that it was worth it to overcompensate and sometimes let us care about sunk costs. Because commitments and sunk costs are often difficult to distinguish, it would have been more costly to evolve better ways of distinguish them than it was to simply make the mistake.

Perhaps people who are outraged by being laid off aren’t actually committing a sunk-cost fallacy at all; perhaps they are instead assuming the existence of a commitment where none exists. “I gave this company 20 good years, and now they’re getting rid of me?” But the truth is, you gave the company nothing. They never committed to keeping you (unless they signed a contract, but that’s different; if they are violating a contract, of course they should be penalized for that). They made you a trade, and when that trade ceases to be advantageous they will stop making it. Corporations don’t think of themselves as having any moral obligations whatsoever; they exist only to make profit. It is certainly debatable whether it was a good idea to set up corporations in this way; but unless and until we change that system it is important to keep it in mind. You will almost never see a corporation do something out of kindness or moral obligation; that’s simply not how corporations work. At best, they do nice things to enhance their brand reputation (Starbucks, Whole Foods, Microsoft, Disney, Costco). Some don’t even bother doing that, letting people hate as long as they continue to buy (Walmart, BP, DeBeers). Actually the former model seems to be more successful lately, which bodes well for the future; but be careful to recognize that few if any of these corporations are genuinely doing it out of the goodness of their hearts. Human beings are often altruistic; corporations are specifically designed not to be.

And there were some things I did promise myself I would keep—like old photos and notebooks that I want to keep as memories—so those went in boxes. Other things were obviously still useful—clothes, furniture, books. But for the rest? It was painful, but I thought about what I could realistically use them for, and if I couldn’t think of anything, they went into the trash.