Friday, January 18, 2013

What do a bad movie and Jets QB Mark Sanchez have in common? They both give you that Sunk Cost feeling. Read here the connection...

 
Here is an excellent article merging an economic concept and a solid real life example---an NFL quarterback and "sunk costs".

The Jets made a large, multi-year, multi-million dollar financial committment to a player, Mark Sanchez.  He has not worked out so well, but they are contractually committed to paying him for a few more seasons. 

Should this finanical committment keep the Jets from playing him and replace him with someone else who might produce a better outcome for the team, or should they play him and pay him is millions even though they are pretty certain he is not going to be "the guy" that gets them to the next level?

In other words, should the past (and ongoing) investment they have in a failing Mark Sanchez be considered a "sunk cost" and have no bearing on what they should do going forward to improve the team? 

All leads back to Opportunity Costs, of course...

That Sunk-Cost Feeling
""...The Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way). But in the real world sunk costs are hard to ignore. Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad. The quintessential case of this is the Concorde. There was never a convincing business case for the supersonic airliner, and there were numerous attempts to kill it. But those attempts all failed, in large part because of the billions that had already been spent....""

Read more: http://www.newyorker.com/talk/financial/2013/01/21/130121ta_talk_surowiecki#ixzz2ILHtsBs5
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