Sunk
Costs, Rationality, and Acting For the Sake of the Past
forthcoming
in Nous 1. Introduction
Suppose that you are in the process of deliberating about how to spend
the remainder of a given evening.
You might attend a theater performance; alternatively, you might remain
at home and read a novel. After
careful reflection, you conclude that although you would enjoy either one of
these activities, you would derive somewhat more enjoyment from remaining at
home and reading the novel. In
these circumstances, it would seem that remaining at home to read the novel is
the rational choice, all else being equal.
Here, however, is a further fact about your circumstances. Some time ago, you purchased a ticket to
this evening's theater performance at what you regard as a high price (say,
$200). Unfortunately, the ticket is
non-refundable. Moreover, it is now
too late to give the ticket away, or to resell it. If you do not attend tonight's theater
performance, the expensive ticket will be wasted.
Would you be more likely to attend the theater performance, knowing that
you had invested a significant sum in the acquisition of the ticket? (More likely than if you had been given
the ticket for free, as the result of some promotional campaign?) Does the fact that you have invested a
considerable sum in the ticket give you a reason to attend the theater
performance, a reason that you would not possess if you had received the ticket
for free? Given that you would in
fact genuinely enjoy the theater performance, and remaining at home to read the
novel would be only marginally more enjoyable, could your heavy past investment
in the ticket actually tip the scales and make a difference to what it is
rational for you to (decide to) do?
Above, I suggested that if in fact you know that you would derive more
enjoyment from reading the novel than from attending the performance, then
remaining at home to read the novel is the rational choice, all else being
equal. Once it has been made clear
that you have invested heavily in a ticket for the performance, is all else
still equal? If you would be more likely
to attend the performance in virtue of having invested heavily in the ticket,
then you tend to honor sunk
costs. Many people--perhaps most people--do
seem to give at least some weight to sunk costs in making decisions. There has always been considerable
anecdotal evidence that this is so; in recent years, a number of psychological
studies have been conducted which purport to provide experimental evidence for
the same conclusion.[1] Questions pursued by
psychologists about the extent to which individuals tend to honor sunk costs are
descriptive questions. In addition
to such (purely) descriptive questions, there are also a number of normative questions, or questions
with normative implications, about the tendency to honor sunk costs. Is giving weight to sunk costs always
irrational (as is typically assumed)?
Would we be better off if we consistently ignored sunk costs? If we could eliminate the tendency to
honor sunk costs, should we do so?
Or are there circumstances in which giving weight to sunk costs has
beneficial consequences and (hence) should be encouraged, or at least, not
actively discouraged? Although much of what
I will say bears on the purely descriptive questions pursued by psychologists,
my primary concern in the present paper is with normative questions of this
sort. Such a concern might seem
perverse. For it is widely agreed
that honoring sunk costs is obviously and clearly irrational, and that doing so
is, without exception, to be avoided.
In economics and business textbooks,
the tendency to honor sunk costs is treated as an elementary fallacy.[2]
Psychologists who conduct experiments purporting to show that individuals
do give some weight to sunk costs take these experiments as (yet further)
psychological evidence of human irrationality and suggest possible remedies for
this condition. It might seem then,
that there are no interesting normative questions about the tendency to honor
sunk costs, inasmuch as all such questions have easy answers. However, I will attempt to show that
things are considerably less clear--and therefore, considerably more
philosophically interesting--than economists and psychologists have sometimes
assumed.[3] The conventional
wisdom about sunk costs then, might be summarized as the conjunction of two
claims: (1) Individuals
often do give weight to sunk costs in their decision-making, and
(2) it is irrational for them to do
so. The first of these
claims encapsulates the conventional wisdom regarding the prevalence of the
relevant practice; the second claim encapsulates the conventional wisdom
regarding its normative status. A
central aim of the present paper is to undermine confidence in the conventional
wisdom, understood as the conjunction of these two claims. (As we will see, which of the two
conjuncts is the more dubious depends on subtle issues about how the phrase
“give weight to sunk costs” is to be understood.) Given its content, one
who calls the conventional wisdom into question naturally appears as one who is
concerned to defend the claim of human beings to being (largely) rational
beings. My primary motivation for
scrutinizing the conventional wisdom, however, is not rooted in a desire to
defend human beings against the charge of irrationality. (Nor is it rooted in a desire to defend
myself against the same charge.)
Rather, my primary motivation is the following. The claim that it is irrational to give
weight to sunk costs in one’s decision-making is naturally understood as a
constraint on the kinds of considerations that can legitimately be offered
as, or taken to be, reasons.
And if in fact it is a common practice for individuals to treat sunk
costs as reasons, then the constraint in question is an extremely substantive
one. In the course of arguing that
one possible action is superior to another, individuals often do seem to
explicitly appeal to sunk costs: that is, they seem to treat sunk costs as
though they are practical reasons.
Such appeals are made in a wide variety of contexts, including public
policy debates in which much is at stake.
So, for example, politicians not infrequently demand further public
funding of costly projects on the grounds that, if such funding is not
forthcoming, previous expenditures will have been for naught.[4] On occasion, the stakes may be even
higher. Thus, in the final years of
The
the many millions of
dollars that have been spent, many thousands of lives have been
lost, and an even greater
number of lives have been irreparably damaged. If
the withdraws from
significant sacrifices
would be wasted.[5] There are, of
course, numerous replies which might be made (and were made) to such
arguments. It might be replied, for
example, that one manifests a due appreciation for the past sacrifices of others
not by continuing the policies that required such sacrifices, but rather by
acting so as to eliminate (or minimize) the need for similar sacrifices in the
future. However, if in fact it is
always irrational to give weight to sunk costs, then it looks as though one need
not waste time with such subtleties.
For lives that are lost in the course of pursuing a given cause are sunk
costs. American soldiers who have
died in the course of pursuing the military objectives of the
In short, the
conventional wisdom about sunk costs seems to suggest an extremely substantive
and quite general constraint on the kinds of consideration that can legitimately
be offered as reasons for action. A
primary concern of the present paper is to determine whether such a constraint
is defensible, and, if it is defensible, exactly which arguments it would rule
out as fallacious.
2. Some Conceptual
Preliminaries The tendency to honor
sunk costs is easily confused with a number of other, distinct tendencies. It will be helpful then, to begin with
some conceptual clarification. Suppose that my
psychology is such that, if I leave an expensive theater ticket unused, I will
feel a considerable amount of regret at having done so. The psychological state of feeling a considerable amount of
regret is, of course, a state which itself has a certain amount of
disutility. In fact, its disutility
might be such as to make a crucial difference as to whether I should attend the
theater performance or stay home.
That is, even, if staying home is in some sense "intrinsically
preferable" to attending the theater performance--if I somehow forgot the actual
circumstances in which I acquired the ticket, I would readily choose to stay
home--it does not follow that it is rational for me to choose (1) over
(2): (1) I stay home to
read the novel and feel a considerable amount of regret at having wasted
a
$200 ticket. (2) I attend the theater
performance and feel no regret. Notice that if I follow through on a certain course of
action in order to avoid the regret that I would feel at having squandered
previously-invested resources, my overt behavior will be identical to the
behavior which I would manifest if I was honoring sunk costs. Moreover, in either case, the following
counterfactual will be true: If I had not
previously invested heavily in this course of action, then I would not
(continue to) perform it
now. However, performing an action in order to avoid future
regret should be carefully distinguished from honoring sunk costs. In the former case, one treats the fact
that by performing this action, I
will avoid a certain amount of future regret as a reason for
performing the action; in the latter case, one treats the fact that I have already invested heavily in this
action as a reason for performing it. To the extent that performing a certain
action will affect my future psychological states in foreseeable ways, I should
take these psychological consequences into account in deciding whether to
perform the action, just as I should take into account any other foreseeable
consequences. To do so is
not to treat sunk costs as practical reasons.[6] As we will see below,
there are various other psychological tendencies which, although distinct from
the tendency to honor sunk costs, manifest themselves in identical overt
behavior across a wide range of situations. Failure to recognize that these other
tendencies are distinct threatens to lead to mistakes with respect to
both the normative and the descriptive issues surrounding sunk costs. So, for example, the fact that it might
on occasion be rational to continue a given course of action in order to avoid
future regret is irrelevant to the question of whether it is ever rational to
honor sunk costs. With respect to
the descriptive question, the fact that much behavior which might be explained
as the manifestation of a tendency to honor sunk costs might also be explained
as the manifestation of some distinct tendency clearly presents the danger that
we will overestimate the pervasiveness of the tendency to honor sunk
costs. In fact, much of the
psychological literature which purports to demonstrate the pervasiveness of the
tendency to honor sunk costs is, I believe, methodologically flawed in exactly
this way. Perhaps the clearest
case is a widely-cited study by Hal Arkes and Catherine Blumer entitled "The
Psychology of Sunk Cost". After
reporting on ten independent experiments, each of which, the authors claim,
supports the view that there is a widespread tendency to honor sunk costs, the
authors propose an explanatory hypothesis in order to account for this
behavior. Their explanation runs as
follows: individuals often continue to pour resources into already-begun
projects because they fear that, if they abandon a project in which they have
already invested heavily, they will be perceived as being wasteful
by others (p.132).
Now, if this explanatory hypothesis is
true, then it undermines the authors’ claim that the behavior in question is
indicative of a tendency to honor sunk costs. That is, the hypothesis that people
continue already-begun projects in order to avoid appearing wasteful competes with the hypothesis that
the same behavior is explained by their treating sunk costs as reasons for
action. Not being perceived as
wasteful by others is, after all, a potentially valuable state of
affairs. Insofar as I am following
through on a given course of action in order to bring about this potentially
valuable state of affairs, I am no more
giving weight to sunk costs than I am when I act in order to bring about any
other worthwhile end. In such
circumstances, it is true that, if I had not previously invested in a certain
course of action, then I would have no reason to continue now: that I have a
reason now is historically or counterfactually dependent on my having made this
past investment. However, my reason
for continuing is not provided by my having made the past investment itself;
rather, my reason is provided by the fact that by performing this action, I
will be able to avoid being thought wasteful by others.[7]
The issue of how the tendency to honor sunk costs is to be demarcated
from other, distinct tendencies is a crucial one, and an issue to which we shall
return below. 3. Honoring Sunk Costs: Some Possible
Advantages It is widely assumed
that rationality requires that one ignore sunk costs in one’s
decision-making. What underlies
this assumption? Here is a natural
thought: rationality requires that one ignore sunk costs because those who
scrupulously ignore sunk costs fare better than those who do not. Firms that give some weight to sunk
costs tend to go out of business more frequently than firms that ignore sunk
costs; individuals who give some weight to sunk costs fare worse with respect to
achieving their goals than individuals who differ from them in this
respect. The claim that
individuals who give some weight to sunk costs fare worse is, however, an
empirical claim, and one which is false if certain not implausible assumptions
are true. Suppose, for example,
that there is a significant statistical correlation between the tendency to give
some weight to sunk costs and the character trait of being strongly averse to waste.
(Plausibly: individuals who are strongly averse to waste are, as a class,
more likely to be influenced by the knowledge that they have already spent $200
on a ticket than individuals who have no such aversion and remain unmoved in the
face of fruitless expenditures.)
And the character trait of being strongly averse to waste might in turn
give rise to greater efficiency on the whole. That is, the tendency to honor sunk
costs might be positively correlated with some other character trait, a trait
whose net effect is to promote the goals of those who possess it. Thus, it is far from obvious that those
who consistently ignore sunk costs fare better than those who do
not. However, even if those
who consistently ignore sunk costs fare no better as a class, we might still
expect that those who consistently ignore sunk costs and have a strong aversion to
waste fare best of all. And isn't
this narrower class the relevant comparison class? Indeed, perhaps a deliberate policy of
always ignoring sunk costs is the theoretically sophisticated
manifestation of an aversion to wasteful behavior. We still have no reason to believe that
honoring sunk costs can itself prove advantageous--even if certain traits with
which it is correlated are advantageous.
Are there circumstances in which the tendency is
advantageous? Robert Nozick has
suggested that our tendency to honor sunk costs plays a beneficial role in
enabling us to overcome temptation.[8] Because we
are reluctant to abandon projects in which we have invested large amounts of
resources, we are less likely to abandon those projects in the face of
temptation, and this tends to promote our long-run well-being. (Here is an example to illustrate
Nozick's idea. An individual is
strongly tempted to cheat on his spouse.
If he does so, he will later regard it as a mistake for the rest of his
life. The individual ultimately
refrains, in part because he reflects on how much he has invested in his
marriage--financially, emotionally, and temporally. These investments are, of course, sunk
costs. But because he allows such
allegedly irrelevant considerations to influence his decision-making, he is
ultimately better off than he would be if had ignored them and succumbed to
temptation.[9]) We might wonder
whether the tendency to honor sunk costs can prove advantageous in the absence
of a tendency to succumb to temptation, or some other character defect. Granted that the tendency to honor sunk
costs might prove beneficial in offsetting weakness in the face of temptation,
would agents who are not flawed in the relevant respects also benefit in
foreseeable ways from this tendency? In fact, there is a
class of game-theoretic situations in which an agent who honors sunk costs
is better off, even if he or she does not suffer from weakness of the
will. Because these situations have
a certain practical importance as well as theoretical interest, they are worth
examining at some length. Recall our earlier
example of the Vietnam War. In the
Vietnam War, the United States faced a Communist adversary of manifest
inferiority. There was no real
possibility of the Communists ever destroying (or indeed, significantly
impairing) the ability of the
United States to continue to pursue its objectives in Indochina. Moreover, this fact was well-understood
by both sides. Nevertheless, the
Communists ultimately achieved all of their objectives, and the Americans
manifestly failed to achieve any of their own. How was this
possible?
Here is a short but true answer to this question: the Communists
succeeded in making it clear to the United States that continued pursuit of its
objectives would result in significant costs, costs that were ultimately judged
to be not worth bearing. Often, a
relatively weak party will
achieve its goals in the face of the open antagonism of a much stronger opponent
by convincing the much stronger opponent that the price of continued struggle is
simply not worth paying. Because
this is so, a weaker opponent will have every reason to maximize the costs that
are incurred by its stronger opponent as the stronger opponent pursues its
goals--these costs then serve as evidence that further pursuit of the relevant
goals will result in similar costs in the future. This, of course, is the principle by
which much terrorism operates: terrorists rarely have any intention, nor any
realistic hope, of significantly impairing the ability of the large states which
they terrorize to continue their policies.
Rather, the point is to convince the large state that continued pursuit
of those policies will carry with it unacceptably-high
costs. Notice, however, that
this (often quite effective) terrorist strategy presupposes that there are very
real limits as to how much weight the stronger opponent gives to sunk
costs. In order to more fully
appreciate this point, it will be helpful to contrast two ideal types: the
expected utility maximizer and the pure honorer of sunk costs. The expected utility maximizer is simply
the ideally rational agent as portrayed by classical economics. As such, she scrupulously ignores sunk
costs in her decision-making. On
the other hand, the pure honorer of sunk costs deliberates in the following
manner: the more resources he has invested in pursuing a given course of action
in the past, the stronger the reasons he takes himself to have to continue that
course of action now and in the future (so long as there is any hope of
achieving the relevant goals at all).
Thus, the nation which decided its foreign policies as a pure honorer of
sunk costs would have the following policy towards terrorists: the more of our
people who have been victimized by terrorist activities in the past, the more
determined we are to stay the course. Notice that while the
typical terrorist tactic of maximizing inflicted costs is an effective strategy
against the expected utility maximizer, it is utterly counterproductive against
the pure honorer of sunk costs. For
the more children the terrorists manage to blow up with bombs, the more
determined the victimized nation is to continue those policies that originally
prompted the bombings, a process that in effect thwarts the desires of the
terrorists. Such a stubborn policy
of honoring sunk costs might seem to be a disastrous policy for the terrorized
nation itself, one which effectively condemns many of its future children to
death via terrorist activities.
But this natural thought ignores the reputation effects that might
accompany being a pure sunk cost honorer.
For over time, would-be terrorists will see that each "successful"
terrorist attack only hardens the resolve of the victimized nation to carry on
with its despised policies. At some
point, the terrorists will realize: these people honor sunk costs.
At that moment, the would-be terrorists acquire strong reasons to
discontinue the policy of maximizing the costs incurred by the larger
nation. In contrast, the pure
expected utility maximizer is at the mercy of the technological wherewithal of
the terrorist, for the terrorist knows that he can successfully manipulate the
behavior of his prey if only he can solve the practical problem of finding a way
to make the costs high enough.[10] Since the pioneering
work of Thomas Schelling, it has been well-known that there are game-theoretic
situations in which individuals and nations benefit in foreseeable ways in
virtue of being less than perfectly rational.[11]
Thus, nations that are practically irrational do not get threatened as
often, because would-be threateners cannot count on the irrational nation to
respond in the desired way. In
being (known to be) rational, one incurs a certain vulnerability to being
manipulated via threats. Our
present point is considerably more radical. It is not only that there is no reason
for a weaker party to maximize the costs incurred by the pure honorer of sunk
costs. Rather, in such
circumstances, the weaker party has strong reasons to take active measures to
minimize the costs that the more powerful nation incurs in pursuing its
detested objectives. If the typical
terrorist tactic is ineffective against one who is not rational, it is
positively counterproductive against one who honors sunk costs. If the United States was known to be a
pure honorer of sunk costs, then the best strategy for the Communists in Vietnam
might very well have been to subsidize a continued American
military presence in Vietnam. For
the Communists would know that, the more financial resources that the Americans
were forced to expend, the more reluctant the Americans would be to leave. The Communists’ best hope might have
been to wait until changing geopolitical circumstances obviated the perceived
benefits of an American presence in Vietnam. (Here is a somewhat
more realistic example to illustrate the same point. A low-level member of a terrorist
organization, enraged by the policies of a hated nation, is motivated by revenge
to launch a terrorist strike. The
leader of the terrorist organization, who knows that the hated nation honors
sunk costs, realizes that such an attack will have only counterproductive
consequences with respect to the ultimate achievement of the terrorists'
goals. The leader thus has strong
reasons to do everything that he can to restrain the vengeful impulses of his
followers, and the nation that honors sunk costs benefits from
this.) There are then,
possible situations in which the pure honorer of sunk costs fares better than
the pure expected utility maximizer.[12] To
say this, of course, is not to say that we would be better off, either
individually or collectively, as honorers of sunk costs than as expected utility
maximizers. Whether it is advantageous to give (some level of) weight to sunk
costs depends on how often contexts arise in which it would be advantageous to
give (that level of) weight to sunk costs, how advantageous doing so is in those
contexts, as well as on parallel facts about all of the many contexts in which
it would be disadvantageous to do so. Best of all, of course, would be to give
weight to sunk costs in all and only those contexts in which doing so is
advantageous, but dispositions are seldom so agreeably fine-tuned in their
manifestations. Before moving on, I
would like to record a certain pessimistic speculation. Often, individuals and
nations, being neither pure expected utility maximizers nor pure honorers of
sunk costs, suffer greatly from giving some weight to both in their
decision-making. Again, the Vietnam
example is instructive. Because we
as Americans give some weight to sunk costs in deciding upon a policy (some
prominent political leaders, and many ordinary citizens, feel that "we need to
stay in, because we've invested so much already"), we stay in considerably
longer than we would have otherwise and thus incur much greater costs than if we
were pure expected utility maximizers.
On the other hand, because we give a great deal of weight to expected
utility (there are very strong limits as to how much weight we give to sunk
costs), and the Communists know this, we receive none of the benefits which we
might enjoy from the reputation-effects of being sunk cost honorers. Thus, the particular mixture of weight
given to considerations of expected utility and to sunk costs might result in
peculiarly bad policies.[13] Suppose that I know that I
would be better off, on the whole, if
I gave some weight to sunk costs than if I consistently ignored
them. (Perhaps I am peculiarly
prone to succumbing to temptation and a tendency to honor sunk costs would help
to offset this destructive habit, or perhaps I stand to benefit from a
reputation of steadfastly pursuing already-begun projects.) What difference would this knowledge
make to what it is rational for me to do?
If I do not already have the advantageous disposition, but there is some
way in which I might acquire it, then (all else being equal) it will be rational
for me to act so as to acquire it.
Alternatively--and perhaps more realistically—if I am already in the
habit of giving weight to sunk costs, then (all else being equal) it would be
irrational for me to attempt to rid myself of this habit.[14] Thus, the
fact that honoring sunk costs can prove foreseeably advantageous might make a
difference to what it is rational to do. Imagine next someone
who has overriding reasons to acquire the disposition and acquires the
disposition for those reasons. When
he subsequently manifests the disposition and benefits as result, is he rational
in so manifesting it? This question is
controversial. Some theorists,
notably David Gauthier, would answer it in the affirmative. According to Gauthier, "a disposition is
rational if and only if having it is most conducive to one's substantive aim"
(1997: p.31). Others disagree. Derek Parfit, for example, has argued
that one can be irrational in manifesting a disposition which best promotes
one's aims, even if one rationally acquired that disposition because one
realized its advantageousness (1984, ch.1). For
Gauthier, "this conclusion should make us suspect Parfit's account of
rationality" (1997, p.31).
Notice that if Gauthier is correct, then there will be (possible)
individuals who take sunk costs into account and are rational in doing so. For there are possible individuals who
would best achieve their substantive aims if they gave some weight to sunk costs
in their decision-making. On the
other hand, if Parfit is correct, then the mere fact that there are possible
individuals who would best achieve their substantive aims by honoring sunk costs
does nothing to show that honoring sunk costs can be rational. Although I believe that Parfit has the
stronger case with respect to this particular issue, I have little to add to the
reasons which Parfit and others have offered in defense of their view--reasons
which Gauthier evidently does not find compelling.[15] Fortunately, we need
not settle this issue here. Having
noted that if Gauthier’s view is correct, then there are possible cases
in which honoring sunk costs is rational, I will simply proceed, in the
remainder of the paper, as though Gauthier’s view is false. This will enable us to examine the
normative status of the tendency even if “being most conducive to one’s
substantive aim” is not in fact a sufficient condition for its
rationality. 4. Sunk Costs and the Concept of a
Redemptive Action (1) In some cases, the
fact that I have previously invested in a given course of action might
constitute evidence that that course of action is likely to succeed or
fail. Suppose that, in anticipation
of becoming a medical doctor, I have previously invested heavily in training,
education, and so on. If, at some
point, I consider whether to continue my pursuit of this goal, I might
underestimate the chances of ultimately achieving the goal if I do not take into
account how much I have already invested in its pursuit. Alternatively, the
fact that I have invested heavily in a given course of action might constitute
evidence that that course of action is unlikely to succeed. Suppose that the United States has
already invested much in attempting to defeat the Communists in Vietnam but has
not yet succeeded. If these past
investments are ignored, then Americans might overestimate the chances of
ultimately achieving this goal--or else, underestimate the future investments
which will be required in order to achieve that goal. In cases in which past
investments in a given course of action influence the probability that that
course of action will be successful if continued, a decision-maker deliberating
behind a veil of ignorance will be at a disadvantage. This, of course, will be readily
conceded by the defender of the view that sunk costs should be ignored: his view
is that sunk costs should be ignored qua sunk costs, not that they are
epistemically
irrelevant.
(2) As we have already noted, in some cases the future value of
successfully carrying out a course of action might depend on whether one has
made a significant past investment in that course of action. Thus, if others will think that I am
wasteful if I fail to achieve some goal in whose pursuit I have already invested
considerable resources, then the value of actually achieving any particular goal
will depend on whether or not I have already invested heavily in its
achievement. This too, will readily
be conceded by the theorist who counsels that sunk costs should be
ignored.
Is the value of knowing about sunk costs exhausted by the
relevance that such knowledge has to deciding cases of type (1) and (2)? Notice that, insofar as the value of
such knowledge is exhausted by its relevance to these two kinds of case, that
value is highly derivative, in the following sense. What is really valuable for present
decision-making is being able to predict the future consequences of possible
actions; knowledge of sunk costs is valuable only insofar as such knowledge
enhances one’s ability to predict those future consequences. Conversely: ignorance of sunk costs is
no handicap to present decision-making (and indeed, might very well be of some
benefit) so long as that ignorance does not hinder one’s ability to predict the
future.
The essentially derivative importance that an awareness of sunk costs has
on this picture can be brought out in the following way. Let us stipulate that the decision
problem facing an agent behind our envisaged veil of ignorance is a decision
under certainty with respect to the future, in the sense that the agent
knows that, if he performs act A1, then the future history of the world will be
H1, while if he performs the alternative action A2, the future history of the
world will be H2. (Suppose, for the
sake of simplicity, that there are only two alternatives under active
consideration. We may also suppose
that in neither of these future histories will the agent violate any
deontological constraints.) These
future histories are complete, in the sense that they include information
about any future regret that the agent will feel, the reputation that he will
enjoy among others, and so on. It
is tempting to conclude that an agent with such a perfectly clear view of the
future has all of the information that he could ever need or want, and that his
ignorance of sunk costs is of no handicap.
For shouldn’t he simply decide which future history of the world is
better, and then act accordingly?
Full knowledge of the future consequences of pursuing a course of action
seems to obviate the need to know of any past investments in that course of
action.
This intuitively appealing line of thought is, I believe, mistaken. In some cases, a knowledge of sunk costs
is essential to knowing what one should do. An agent who lacked such knowledge would
be at a disadvantage with respect to his decision-making, even if he had perfect
knowledge of the future consequences of his actions.
Before arguing for this conclusion, I want to examine the source of the
intuitive appeal of the contrary view.
Why is it natural to suppose that while the future consequences of
performing an action are highly relevant to the question of whether that action
should be performed, past investments in that course of action are wholly
irrelevant? The following, I think,
is a natural answer to this question: While actions that we
perform now can affect the future, they are powerless to affect the past. Sunk costs are, by definition, costs
that cannot be recovered, no matter how the agent decides to act. And it is because of this that they can
and should be ignored.
However, the claim that present actions cannot affect past events
requires a certain amount of interpretation. It is a philosophical commonplace that
the significance of past events might depend on the causal relations which they
bear to future events, future events whose occurrence (or nonoccurrence) might
depend on what we do now. A
criminal seriously wounds an innocent person; hours later, a doctor struggles to
save the victim’s life. Whether the
criminal has or has not committed a murder depends on whether the doctor’s later
efforts are successful. Some years
ago, Arthur Danto emphasized the extent to which many of the most significant
descriptions of prominent historical events depend for their applicability on
the subsequent (and often highly-contingent) occurrence of later events
(1985).
More recently,
a number of writers have held that the significance of particular events within
an individual life can depend on how they are embedded within larger narrative
structures; the value of events which are identical with respect to their
intrinsic properties might vary greatly depending on how they are embedded
within larger contexts. Consider,
for example, David Velleman on how learning from a misfortune can help to
transform the significance of an earlier event: The point of learning
from a misfortune, surely, is to prevent that misfortune from being a total loss. Learning from the misfortune confers
some value on it, by making it the means to one’s
edification…conferring instrumental value on a misfortune alters its meaning,
its significance in the story of one’s
life…an edifying misfortune is not just offset but redeemed, by being
given a meaningful place in one’s progress through life (2000, p.65).
More generally …later events…alter the
significance of earlier events, thereby altering their contribution to the value of one’s life
(2000, p.65). Charles Taylor has similarly written of our desire for “the
future to ‘redeem’ the past, to make it part of a life story which has sense or
purpose”(1989, p.43).[16]
A common theme of such thinkers is this: present actions can affect the
significance of past events in ways that matter deeply to us. This fact, I think, has important
implications for the topic of sunk costs.
For it is because present actions can affect the significance of past
events in ways that matter deeply to us that an individual who had a perfectly
clear view of the future, but who was wholly ignorant of sunk costs, would be at
a distinct disadvantage with respect to his ability to satisfy certain quite
natural preferences.[17] That is, knowledge of sunk costs is
essential to the fulfillment of certain preferences. Let us describe one such
preference. One might prefer that,
if others have made significant sacrifices in attempting to realize some
valuable state of affairs S, then their sacrifices not be in vain. That is, one might prefer that these
sacrifices causally contribute to the realization of some valuable state of
affairs. (Perhaps one regards it as
important that the sacrifices in question result in the achievement of the
originally-intended valuable state of affairs S; or perhaps one thinks that what
is important is simply that some valuable state of affairs results. These are, of course, importantly
different preferences, although satisfaction of the first suffices for
satisfaction of the second.)
Interestingly, one sometimes is in a position to determine, by
one’s own actions, whether the past efforts of others will have been in
vain. This is true, for example,
when it is within one’s power to finish some valuable project in whose service
others have labored, but which they are now not in a position to complete.
Let us say that when one acts so as to prevent the past efforts of others
from having been in vain one redeems those efforts. One might regard it as valuable that the
efforts of others not be in vain, and thus, regard the fact that a given action
is a redemptive action as an (additional) reason for performing it. Notice that if I do have such a
preference for redemptive actions, then being ignorant of sunk costs will
effectively frustrate my ability to satisfy it. For whether or not a given action is the
action which I have most reason to perform might depend on whether that action
is a redemptive action. And whether that action is a redemptive action will
depend in turn on whether there is some valuable state of affairs S which would
be both (i) a causal consequence of my action, and (ii) a causal consequence of
the efforts of others, efforts which would otherwise remain unredeemed.[18]
In short: the fact that significant investments have been made in the
course of pursuing some goal G can give rise to new reasons to pursue G (in
addition to whatever reasons originally existed for pursuing G). And in a given case, these new reasons
might make a decisive difference to whether one should act so as to bring about
G, or in some alternative way instead.[19] It is because such cases are possible
that knowledge of sunk costs is sometimes essential to knowing what one should
do. There is nothing, I believe,
irrational about such “backward-looking” preferences. This claim will be readily conceded by
those who hold that preferences are not subject to rational criticism, as well
as by those who hold, more weakly, that although sets of preferences can be
jointly irrational, no particular preference can be intrinsically
irrational. But even if we adopt a
less liberal view, and admit that some preferences are intrinsically
irrational,[20] it is unclear why preferences for
redemption should be included among this class. (We will return to this issue briefly in
Section 6 below.)
If we take seriously the idea that the significance of past events can be
altered by what happens in the future, then we should be open to the following
possibility. An agent behind the
veil of ignorance decides that future history H1 is better than future H2, and
chooses accordingly. If, however,
he was not ignorant of sunk costs, he would choose to act so as to actualize H2,
for the redemptive power of H2 significantly exceeds that of H1.
The possibility that one might have an independent preference which
motivates one to pursue old goals is noted in passing by Steele (1996,
p.617). He claims—correctly, I
believe—that there need be nothing irrational about such preferences, or about
attempting to fulfill them.
However, he regards the preferences which generate such reasons as
eccentric: in the space of a paragraph, he refers to the circumstances which
give rise to them as “bizarre”, “unusual” and “peculiar”. This, I think, is a mistake. On the contrary, such preferences are
quite common. Above, we noted that
one might have a preference that the past sacrifices of others not be in
vain. Although this preference is,
I think, fairly common, it is perhaps much less common than its self-centered
analogue, viz. that one’s own past efforts and sacrifices not be in
vain.
The claim that individuals often strongly prefer that their own past
efforts be redeemed receives support from an interesting phenomenon which has
been emphasized by Gilbert Harman.
Harman observes that, so strong is our desire to see our own past efforts
play a role in bringing about valuable ends, we will often adopt new
ends, carefully tailored, so that our past efforts can be seen as instrumentally
valuable means to the achievement of these ends.
Sometimes one adopts an end so that things that one has already done…can
gain significance as a
means toward the end that one now adopts.
This is how some people choose careers—so that
their earlier training will not be wasted.
The typical teacher of physics, for example, did not originally study the
subject with the purpose of becoming a
physics teacher. He studied the
subject because it interested him or perhaps because it was
a required subject. Later he
decided to become a teacher of physics; at that point he was
able to see his earlier study as part of the means by which he is able to become a physics
teacher—and that is part of his reason for becoming a physics teacher: so that his earlier study
will not have been wasted. It is
true that he enjoys physics (let us suppose), so he is
choosing a career that will allow him to do something that he enjoys doing. But that is only one consideration. It is also relevant that that in
becoming a physics teacher he gives
significance to his earlier study and to that extent helps to unify his
life. If he had chosen instead
to do something else…his training in physics might…have had no significance—it would
have been wasted. It would have
lost connection with his later life, a connection that could
have helped to give his life unity…Past acts done for other reasons assume a pattern in
the light of ends adopted only now.
We adopt ends that help to rationalize and give significance to what we
have been and are doing—not only in
large decisions, as in choosing careers, but even in our smallest and most insignificant
acts (1999, pp.72-73).
Here, Harman is concerned with the adoption of new ends as a way of
bestowing meaning and significance upon one’s previous efforts. This differs from the phenomenon with
which we have been primarily concerned, in which an agent continues to pursue an
old end so that her previous efforts on its behalf will not be in vain. In both cases, however, the underlying
motivation is the same: the desire to see one’s previous efforts redeemed. We should expect that, often, of the
various ends which one might pursue in order to redeem some previous effort, it
will be most rational to pursue that end E in whose pursuit the effort was
originally expended. After all,
because the effort was originally put forth with E in view, the particular
actions in which it manifested itself were selected because of their perceived
efficacy as means for achieving E, as opposed to any other end. We would expect then, that the desire
that one’s previous efforts not be in vain would often lead to the continued
pursuit of the end towards which the efforts were originally directed. 5.
The Role of Past Sacrifices in Practical Deliberation:
Some Proposals
I have suggested that an agent who treats the fact that a given action
would be a redemptive action as a reason for performing it need not be
irrational in doing so. One who
makes such a suggestion naturally invites a host of further questions. How exactly should considerations of the
past fit into one’s all-things-considered deliberations? Are there normative principles which
dictate when one ought to write off sunk costs, notwithstanding that one will
have to chalk them up as a waste?
What (if anything) underwrites the value of redemption, or the value of
having a life which possesses narrative unity?
I believe that answering these and related questions in a wholly
satisfactory way would require something approaching a full-fledged theory of
practical reasoning, a theory which I do not possess. Nevertheless, in this section I offer
some proposals which bear on the relevant issues.
Let us begin by noting some limitations on the capacity of past
sacrifices to generate present reasons for action. Above, I claimed that the fact that
significant sacrifices have been made in the course of pursuing some goal G can
give rise to new reasons to pursue G, and that, in a given case, these new
reasons might make a decisive difference to whether one should act so as to
bring about G or in some alternative way instead. In attempting to make these claims
plausible, I focused on cases in which there is originally some independent
reason for pursuing G, apart from any past sacrifices that have been made in its
pursuit. A more radical view would
hold that, even if there were originally no reason for pursuing G, the fact that
in the past much effort has been (mistakenly) spent in its pursuit can now
provide a genuine reason for continuing to pursue it. If this more radical view were true,
then goals which there was originally no reason to pursue might “bootstrap”
their way into being rationally pursued, simply in virtue of having been pursued
in the past.[21] But this more radical view should, I
think, be rejected. Its inadequacy
is perhaps clearest in cases in which the original pursuit of the goal G is
motivated by false beliefs about the value of its achievement. Thus, suppose that I have expended
considerable energy and effort in an attempt to locate a particular book because
I believe that it contains the answer to some question about which I am
curious. In virtue of these past
efforts, I have managed to narrow down the range of the book’s possible
locations; I am thus closer to finding it than I was at the outset of my search,
and, if I now proceed to find it, these past efforts will have played an
essential role in the causal history of my doing so. Suppose, however, that before I am able
to find the book in question, I learn that it does not in fact contain the
answer to my question. In these
circumstances, it would be irrational, I believe, to continue my search simply
because otherwise my past efforts will have been for naught. Here then is a substantive constraint on
the potential of past sacrifices to generate present reasons for action: past
sacrifices expended in pursuit of a goal G can generate further reasons for
pursuing G only if there is some independent reason to achieve G.
Another case in which it seems that past efforts which have yet to bear
fruit can simply be written off without risk of offending against some
significant value is when those efforts are constitutive parts of some larger
effort or project that has itself proven fruitful. Notice that not every constitutive part
of a fruitful project need itself be fruitful, or contribute to the fruitfulness
of the whole. Thus, imagine a
graduate student who has recently completed a successful dissertation. During the years which she has devoted
to this project, some of the lines
of inquiry which she has pursued
have not resulted in significant contributions to the finished version. (Indeed, we can suppose that the
ultimate content of the dissertation is not in any way affected by the fact that
these lines of inquiry were pursued.)
Nevertheless, from her present perspective, the graduate student views
these efforts as constitutive parts of the larger, temporally extended project
which ultimately culminated in the successful dissertation. The fact that these fruitless efforts
are naturally viewed as part of a larger project that did prove fruitful seems
to obviate any need to redeem them (despite the fact that, strictly speaking,
they did not causally contribute to the value manifested by the finished
product).[22]
What, if anything, accounts for the value of redemption in those cases in
which it is plausibly taken to be of some value? The fact that in some circumstances we
(or at least, many of us) are inclined to value redemption seems to derive from
a fundamental respect for persons and their projects. It is not simply the fact that precious
resources have been expended but rather that the relevant costs have been
incurred by agents pursuing particular projects which we take to be
worthwhile. After all, a strictly
natural process might consume large amounts of valuable resources (redwoods
trees, or fossil fuels). As a
result of such a process running its course, we might find that some valuable
state of affairs has been brought within “striking distance”: it now lies within
our power to achieve this state of affairs, and, if we do so, the past
consumption of these valuable resources will have played an indispensable role
in the causal history of its achievement.
Whether we ought to devote further resources to achieving the relevant
state of affairs depends, I think, solely on how valuable its achievement would
be compared to what else we might achieve by using these further resources in
alternative ways: the mere fact that (say) significant numbers of redwoods have
already been consumed is not, I think, a consideration which should enter into
our deliberations at this point. In
contrast, the fact that one’s ancestors have toiled for generations in the
pursuit of some goal (a goal which one recognizes as having some positive value)
can, I think, properly enter into one’s deliberations as a consideration which
counts in favor of devoting further
resources to its pursuit. In this
way, the value of redemption seems to derive from a more fundamental respect for
agents and their projects.
If this speculation about the source of the value of redemption is
correct, then it naturally suggests another general principle as to how we
should and should not attempt to redeem the past sacrifices of others. In the last section, I noted that we
should distinguish between two importantly different preferences that one might
have: (i)
that the past sacrifices of others causally contribute
to the realization of some valuable state of affairs, and (ii)
that the past sacrifices of others causally contribute
to the realization of that valuable state of affairs in the pursuit of which
those sacrifices were originally made. If in fact the value of redemption derives from a more
fundamental respect for agents and their projects, then the second preference
might seem to constitute a more fitting manifestation of such respect (at least,
all else being equal). Similarly:
even if one does attempt to redeem the past sacrifices of others by bringing
about some state of affairs that they would not have recognized as valuable, it
seems important that the individuals in question would at least not have
despised the relevant outcome, or have been horrified by the knowledge that
their past efforts played a role in the causal history of its realization.
We have emphasized that one who values redemption will tend to prefer
redemptive actions to non-redemptive actions. It is worth noting though, that one who
values redemption will allow this fact to enter into her practical deliberations
in other ways as well. Thus,
valuing redemption might give one reasons to choose some redemptive actions over
other redemptive actions: even if A1 and A2 are both redemptive actions, A1
might redeem all of the past efforts which A2 redeems, and some additional past
efforts as well. Or perhaps, more
individuals would have their efforts redeemed by A1, or the sacrifices which A1
redeems might be more significant.
That is, some redemptive actions might be more redemptive, or have
greater redemptive power, than others.
Conversely, an agent who values redemption might have reasons for
preferring some non-redemptive actions to other non-redemptive actions: even if
doing A1 does not suffice to redeem certain past efforts, it might bring those
efforts closer to redemption than doing A2. (Because A1 has been performed, the
probability of the efforts ultimately being redeemed is increased, or it is now
easier for others to redeem the past efforts than it would be if A2 had been
performed.) Or perhaps, even if
doing A1 does not raise the probability of redemption, it does not lower that
probability, which would be a result of doing A2. Clearly, there are many possibilities
here. 6. Conclusion: The Conventional Wisdom
Reconsidered
Suppose that I have a preference that my past efforts not be in
vain. Suppose further that because
I have this preference, I sometimes perform actions which are intended to
further projects in whose service I have made significant efforts in the past,
actions which I would not perform were it not for their status as redemptive
actions. This preference is not, I
have claimed, irrational. And if
this preference is not irrational, the behavior which I exhibit in attempting to
better satisfy it need not be irrational either.
If my behavior is not irrational, then the salient question becomes: in
behaving in this way, am I honoring sunk costs? For if my behavior does count as a
genuine case of honoring sunk costs, and my behavior is not irrational, then we
can immediately conclude: giving weight to sunk costs is not always
irrational.
Whether my behavior does count as giving weight to sunk costs depends on
what is meant by “giving weight to sunk costs”. In discussions of sunk costs, some
participants use the relevant terminology in an inclusive manner. Thus, Arkes and Blumer define “the sunk
cost effect” as “a greater tendency to continue an endeavor once an investment
in time, effort, or money has been made” (1985, p.124). Given such a wide definition, my
behavior will count as a genuine case of giving weight to sunk costs. Such wide definitions are,
unsurprisingly, popular among psychologists seeking to show that human beings
often do give weight to sunk costs in their decision-making.
On the other hand, others who have discussed sunk costs have
circumscribed the relevant tendency more narrowly. As we have noted, Steele explicitly
distinguishes the honoring of sunk costs from cases in which one has an
independent preference for finishing already-begun projects. On such a narrow construal, my behavior
will not qualify as a genuine case of giving weight to sunk costs, and so the
rationality of my behavior does nothing to show that giving weight to sunk costs
is (ever) rational.
There are, I believe, reasons for preferring the less inclusive
terminology.[23] However, it is not my intention to
(attempt to) legislate how the relevant terminology should be used. Rather, I want to suggest that the fact
that different theorists have used the same terminology in different ways should
have important consequences for our confidence in the conventional wisdom about
sunk costs. In Section 1, I claimed
that that conventional wisdom could be summarized as the conjunction of two
claims:
(1) Individuals often do
give weight to sunk costs in their decision-making, and
(2) It is irrational to for
them to do so.
My present suggestion is that we should be much less confident that the
conventional wisdom is true, once we recognize that the phrase “giving weight to
sunk costs” is highly susceptible to being used equivocally. Suppose, for example, that we employ a
wide definition of what it is to give weight to sunk costs—according to
which (say) one is giving weight to sunk costs insofar as past investments in a
given course of action make it more likely that one will choose to continue that
course of action. In that case, we
can expect that there will be no shortage of evidence—either anecdotal or the
kind of evidence supplied by the psychology laboratory—that we do honor
sunk costs. Given such a wide
definition, however, the behavior in question need not be irrational. That is, if we interpret the phrase
“giving weight to sunk costs” in such a way as to make claim (1) clearly true,
then the normative claim (2) will not be compelling. On the other hand, if we employ a narrow
definition, then the normative claim will be (much more) defensible[24]. Given such a narrow definition, however,
it then becomes unclear whether giving weight to sunk costs is something which
people actually do with any interesting degree of frequency. That is, given a narrow definition, (2)
will be defensible, but (1) becomes dubious. Indeed, given such a narrow definition,
many of the paradigm examples which are often used to illustrate the tendency do
not count as genuine cases of honoring sunk costs at all. Consider, once more, an example which is
often employed as a paradigm case of giving weight to sunk costs, and indeed,
one which we ourselves have employed as such throughout the present paper: the
Vietnam War. Those who appealed to
lives already lost as reasons for staying the course in Vietnam are naturally
understood, I believe, as advocating such a policy as a means of
redeeming those lives.
Again, we might criticize such appeals: on the grounds that the value of
redemption should not be given priority over other, competing values (e.g., the
value of saving future lives), or perhaps, on the grounds that continued
prosecution of a war which many believed to be deeply immoral could not
result in the redemption of those lives.
To criticize such an appeal in either of these ways, however, is not to
criticize it on the grounds that it embodies a sunk cost fallacy.
We might wonder: given a narrow definition, what would count as a
genuine case of giving weight to sunk costs? Consider two different considerations
which might be cited as reasons for continuing some war: (1)
We have already lost many lives in this war. (2)
We have already lost many lives in this war, and if we
pull out now, these lives will have been wasted. If, on the other hand, we continue to
prosecute this war, these lives might be redeemed. Imagine someone who claimed that (1) provided a reason for
staying the course, but who truly denied that this consideration could be more
accurately captured by (2), or by some similar formulation. That is, imagine someone who takes the
mere fact that much has been lost in pursuing some goal as a reason for
continuing to pursue that goal.
This, I think, would be a genuine case of giving weight to sunk costs,
even on a narrow definition. Such
individuals are imaginable, but they are not, I suspect, often encountered in
real life. It would be unwise, of
course, to assume that someone who explicitly cites (1) rather than (2) as a
reason for action is actually giving weight to sunk costs. For typically, in such circumstances it
will be appropriate to interpret the argument on offer as an enthymeme, which,
fully articulated, would resemble (2).[25]
Indeed, if, as many have argued, our practice of interpretation is
governed by principles of charity, won’t it (almost?) always be reasonable to
attribute a preference for redemption, or some similar preference, to an agent
who is apparently giving weight to sunk costs? Here we encounter familiar worries about
the trivialization of expected utility theory as a descriptive theory of human
behavior. But the present case is
not merely a special case of the general worry, I think, since there is often—as
in the Vietnam example—some independent reason[26] for attributing the relevant
preference.
One might, of course, argue that it is irrational to privilege a desire
for redemption when doing so promises to result in losses that have not yet been
incurred. Notice, however, that one
who does so is once again engaged in the difficult task of arguing about how
conflicts among competing values should be decided. And much of the allure—as well as the
dialectical effectiveness—of identifying certain general patterns of arguments
as fallacious lies in the promise that, by doing so, one can effectively
circumvent difficult-to-arbitrate disputes about how competing values should be
ranked.
There is, I believe, ample reason for skepticism about the idea that the
rational requirement to ignore sunk costs is, when narrowly understood, a
constraint with which much actual human behavior is inconsistent. We might have hoped otherwise. We might have hoped, for example, that a
whole family of arguments for continuing costly endeavors might be dismissed out
of hand, quickly and cleanly, as fallacious. If we are charitable, however, we should
admit that few arguments seriously put forth are best understood as embodying
this particular fallacy, and that we are unlikely to be spared the far messier
and more difficult task of arguing about the value of competing ends, or about
the worth of different goals.[27] References Anderson, Elizabeth.
(1993) Value in Ethics and
Economics. (Cambridge, MA:
Harvard University Press) Anderson, Elizabeth. (1996) “Reasons, Attitudes, and Values: Replies
to Sturgeon and Piper”, Ethics 106: 538-554. Arkes, H.R. and Blumer, C.
(1985) “The Psychology of Sunk
Cost”, Organizational Behavior and Human Decision
Processes 35: 1224-140. Bratman, Michael. (1987) Intention, Plans, and Practical
Reason. (Cambridge, MA:
Harvard University Press) Danto, Arthur. (1985) Analytical Philosophy of
History. Reprinted under the
title Narration and Knowledge (New York:
Columbia University Press). Foley, Richard. (1987) The Theory of Epistemic
Rationality (Cambridge, MA: Harvard University Press) Friedman, David. (1986) Price Theory: An Intermediate
Text (Cincinnati: South-Western). Garland, Howard. (1990) “Throwing Good Money After Bad: the
Effect of Sunk Costs on the Decision to Escalate Commitment to
an Ongoing Project”, Journal of Applied Psychology Vol.75 (6) Dec: 728-731. Gauthier, David. (1997) “Rationality and the Rational Aim”, in
Jonathan Dancy (ed.) Reading Parfit (Oxford: Blackwell):
24-41. Harman, Gilbert. (1999) “Practical Reasoning”. Reprinted in his Reasoning, Meaning,
and Mind (Oxford: Oxford University Press):
46-74. Harman, Gilbert. (1986) Change In View. (Cambridge, MA: M.I.T. Press). Kelly, Thomas. (2002) “The Rationality of Belief And
Some Other Propositional Attitudes”, Philosophical Studies 110:
163-196. MacIntyre, Alasdair. (1984) After Virtue. (Notre Dame: University of Notre Dame
Press). Nagl, Thomas. (1987) The Strategy and Tactics of Pricing:
A Guide to Profitable Decision-
Making (Englewood Cliffs,
NJ: Prentice Hall). Nozick, Robert. (1993) The Nature of Rationality. (Princeton: Princeton University
Press). Parfit, Derek. (1984) Reasons and Persons. (Oxford: Clarendon Press). Parft, Derek. (2001) “Bombs and Coconuts, or Rational
Irrationality” in Morris and Ripstein (eds.) Practical
Rationality and Preference: Essays for David Gauthier (Cambridge, UK: Cambridge University Press):
81-97. Parfit, Derek. (unpublished manuscript)
Rediscovering Reasons. Rawls, John. (1972) A Theory of Justice. (Cambridge, MA: Harvard University
Press). Scanlon, Thomas. (1998) What We Owe to Each Other. (Cambridge, MA: Harvard University Press). Schelling, Thomas. (1960) The Strategy of Conflict. (Cambridge, MA: Harvard University Press). Schelling, Thomas. (1966) Arms and Influence. (New Haven: Yale University Press). Steele, David Ramsey. (1996) “Nozick on Sunk Costs”, Ethics
106: 605-620. Sturgeon, Nicholas L. (1996) “Anderson on Reason and Value”,
Ethics 106: 509-524. Taylor, Charles. (1989) Sources of the Self: The Making of
Modern Identity.
(Cambridge: Harvard University Press). Velleman, David. (2000) “Well-Being and Time” reprinted
in his collection, The Possibility of Practical Reason (Oxford:
Oxford University Press): 56-84. Weber, Michael. (1998) “The Resilience of the Allais Paradox”,
Ethics 109: 94-118. [1]See, for example, Arkes and
Blumer (1985), and the further references cited there, as well as Garland
(1990). As will become clear below,
the probative value of both the anecdotes and the studies is not beyond
question. [2]For representative examples, see Friedman (1986,
pp.279-280) and Nagl (1987, pp.21-23). [3] In
fact, there are are two distinct forms of what is sometimes called “the sunk
cost fallacy”. The first form
manifests itself in a reluctance to abandon projects in which one has already
invested considerable resources.
This form—which has received more attention from psychologists and from
those few philosophers to have addressed the topic of sunk costs—will be our
exclusive concern in what follows.
The second form is in some ways an opposite tendency, inasmuch as it
manifests itself in the premature abandonment of projects. Thus, many individuals will abandon a
project once they realize that, given the past investments that have been made,
the project has no hope of earning a net profit when taken as a whole. This conflicts with the advice that the
economists offers, which is to ignore the past investments and continue the
project if and only if it promises to be profitable from the present moment
on. For good explanations of the
distinction, see Steele (1996, pp.608-610) and Friedman (1986,
pp.279-280). [4]Of course, the mere fact that someone appeals to sunk
costs as a normative reason for pursuing a given policy does not show that he
himself takes those sunk costs as constituting a genuine normative reason for
pursuing that policy. If I believe
that others tend to (mistakenly) treat sunk costs as reasons, then I might
disingenuously appeal to sunk costs in attempting to influence their
behavior. [5] The physicist Eugene Demler informs me
that exactly parallel arguments were quite commonly made in the Soviet Union in
the late 1980s in an attempt to justify continued Soviet involvement in
Afghanistan. [6] It might be thought that questions about
the rationality of continuing some course of action in order to avoid future
regret cannot be so neatly disentangled from questions about the rationality of
giving weight to sunk costs. For—it
might be claimed—if one does not treat sunk costs as reasons for action, then
one will have no reason to feel any regret at leaving the expensive ticket
unused. Concede, for the sake
of argument, that one who does not treat sunk costs as reasons will have no
reason to feel regret in the relevant circumstances. From this, of course, it does not follow
that one will feel no regret after leaving the ticket unused—only that one will
feel no regret insofar as one is rational. If I know that I will feel regret upon
performing a certain action, then it is rational for me to take that regret into
account in deciding whether to perform that action—even if such regret would be
irrational (indeed, even if I acknowledge that such regret would be
irrational). Compare, in a somewhat
different context, Webber 1998, p.114.
In general, however, Webber is more skeptical than I am about the
prospect of appealing to regret-avoidance in order to rationalize otherwise
irrational behavior. (Webber does
not specifically address the topic of sunk costs.) [7] As an anonymous referee pointed out to
me, here (as elsewhere) the deficiencies in the psychological literature seem
attributable to an overly behavioristic
focus. [8]Nozick (1993,
pp.21-25). I borrow the terminology
of “honoring” sunk costs from Nozick’s discussion. [9] Here and below, I will ignore the
possibility that past commitments of this sort generate moral obligations which
normatively constrain the agent’s future behavior. Although highly plausible in this
particular example, the feature is incidental. [10] Of course, the best strategy for the pure
expected utility maximizer might very well be to mimic the behavior of
the pure honorer of sunk costs in an effort to win the advantages that accompany
being perceived as one who honors sunk costs. Mimicking the behavior of the sunk cost
honorer need not involve honoring sunk costs and indeed, might very well be
enjoined by the maxim of maximizing expected utility. Whether such a strategy of deception is
successful will depend not only on the skill of the mimicry but also on the
perceptiveness of the opponent. I
assume that the possibility of deception is not always available, and that (in
some cases at least) there are limits to one’s ability to make one’s true
policies opaque to others who have strong interests in correctly interpreting
those policies. Difficulties in making one’s true policies opaque will
be especially acute in democratic societies in which the content of the policies
is at least somewhat responsive to the publicly manifested preferences of the
citizenry. [11]See Schelling (1960) and
(1966). For a philosophical
application of Schelling’s ideas, see Parfit (1984, Part I). Nozick notes the possibility of a
connection between Schelling’s work and the topic of sunk costs in a passing
remark (1993, p.24). [12] Moreover, there are possible situations
in which the pure honorer of sunk costs fares better in systematic and
predictable ways. In his critique
of Nozick, Steele suggests that Nozick’s observations about the possible role
that sunk cost honoring plays in offsetting weakness of the will are essentially
uninteresting, inasmuch as “…any type of error might be compensated for by some
other error to yield a desirable outcome.
We can equally well imagine some circumstances in which supposing that
2+2=5 would have a welcome outcome…” (Steele 1996: 608). No doubt, it is (almost always) a
trivial matter to describe fortuitous circumstances in which an ostensibly
irrational tendency or mistaken belief proves beneficial. What is not trivial, however, is to
specify an interesting class of cases—the members of which are neither a
hopelessly gerrymandered lot nor trivial variations of one another—in which an
ostensibly irrational tendency proves advantageous in systematic ways, ways that
might very well have been forseen from the perspective of the agent herself.
[13]Notice that in a society in which power is diffuse, the
peculiarly bad policies in question need not be favored by any group or
individual in the society (and indeed, might even be recognized as
peculiarly bad policies by everyone) but arise naturally as the vector sum of
competing views about what ought to be done. (Some cite sunk costs as reasons for
staying the course until victory is achieved; others appeal to considerations of
utility as reasons for getting out immediately; the divided nation ends up
lingering for years and then pulls out without achieving any of its original
goals.) [14]As Nozick speculates: “if
someone offered us a pill that henceforth would make us people who never honored
sunk costs, we might be ill-advised to take it” (1993,
p.23). [15]See especially Parfit’s
reply (2001) to Gauthier. The claim
that a disposition might be irrational even if having that disposition best
promotes an agent's substantive aims is perhaps most compelling when we consider
dispositions to believe. Consider,
for example, an athlete who benefits greatly, in predictable ways, from a
disposition to form overly optimistic beliefs about his chances of success. If the athlete's degrees of confidence
far outrun his evidence, then isn't it clear that he is being irrational,
despite the fact that he benefits from the relevant disposition? However, even the claim that the
athlete's overly optimistic beliefs are irrational is controversial. Richard Foley, for example, would deny
that the athlete’s beliefs need be irrational. (See his 1987 chapter 5). Elsewhere, I have argued that the
expected utility of holding a belief is irrelevant to the normative status of
that belief (Kelly 2002). [16] On “the unity of a life”, see also
Alasdair MacIntyre’s stimulating discussion (1984, ch.15). Elizabeth Anderson briefly connects the
topics of sunk costs and “narrative unity” in her (1993,
pp.34-35). [17] In what follows, I will write as though
the opportunity to satisfy some preference—or at least, the opportunity to
satisfy some rational preference—provides one with a reason for
action. I proceed in this way
because such a view about practical rationality is typically presupposed by
those who discuss sunk costs, especially those economists and psychologists who
regard giving weight to sunk costs as a paradigm of irrational behavior. The argument of the present paper would,
I believe, be no less (and no more) compelling if it were recast in way that
presupposes the truth of some alternative view. For recent development and defense of
views according to which the notion of preference satisfaction does not play a
central role, see Scanlon (1998) and Parfit
(unpublished). [18] Here I simply gesture at (one) notion of
a “redemptive action”, without attempting to define that notion. Attempts at definition would have to
accommodate the following kind of case.
Suppose that I redeem some past efforts by performing act A1, but that,
if I had not performed A1, I would have performed act A2 instead, which also
would have redeemed the same past efforts.
Intuitively, act A1 should count as a redemptive action, but it would be
denied that status by condition (ii), since, if A1 had not been performed, the
efforts which it redeems would not have gone unredeemed but would have been
redeemed by A2 instead. (Here as
elsewhere, analyses which make use of counterfactual locutions are
vulnerable to the phenomenon of asymmetric overdetermination.) Of course, in the envisaged
circumstances the fact that A1 would be a redemptive action would not count as a
reason for performing it instead of A2, since the latter action would also have
this status. [19] Anderson endorses such “backward-looking”
reasoning as legitimate and suggests that consequentialism is undermined by an
inability to account for its status as such (1993, pp.34-35). Sturgeon (1996) agrees that the
reasoning is legitimate but argues that consequentalism can accommodate this
fact (see especially pages 511-513).
See also Anderson’s reply to Sturgeon in the same volume
(pp.541-542). [20]A possible example: the
preference for great pain on a future Tuesday to the mildest pain on any other
future day. See Parfit (1984,
pp.120-125). [21] Compare “conservative” accounts of belief
revision, according to which the mere fact that a proposition is presently
believed makes it reasonable to continue to believe it in the absence of
positive reasons for doing otherwise—even if it would not be reasonable to
acquire the belief anew. For the
development of such a view, see Harman (1986, ch.6). Bratman (1987) defends a somewhat
analogous view with respect to intentions.
Each of these views has, I think, more to be said in its favor than the
one that I discuss in the text. [22] For emphasizing that there are important
issues arising from the fact that the scope of the relevant actions can be
demarcated in different ways, I am much indebted to the
referee. [23] Notice that if we employ the more
inclusive terminology, then the norm of maximizing expected utility might
actually require individuals with certain preferences to “honor sunk
costs”. It would be better, I
think, to avoid this. [24] I include the parenthetical hedge in
order to give due deference to the fact that the issue between Parfit and
Gauthier discussed at the conclusion of Section 3 has not yet been decisively
resolved. For if Gauthier is
correct with respect to that particular issue, then the normative claim (2)
might be open to challenge even if a narrow definition is
employed. [25] Because the conviction that people
frequently do give weight to sunk costs in a way that is clearly irrational is
widespread and well-entrenched, it is perhaps worth scrutinizing another
putative paradigm of such behavior, in order to show that it too admits of a
similar treatment. I have in mind
the gambler who “throws good money after bad” in an effort to recoup his
previous losses. (That is, in an
effort to break even, the gambler continues to gamble, accepting bets that he
would regard as unacceptable if not for his previous losses.) Here too, we have a case in which the
continuing of a given activity is counterfactually dependent on past
expenditures. Notice, however, that
insofar as the gambler is driven by a desire to “break even”, he is not
giving weight to sunk costs in the narrow sense. For the fact that winning these future
bets would allow him to break even effectively changes the value of those bets
from his perspective. That is,
someone with a standing, independent preference for breaking even will be
willing to accept certain bets when he is behind that he would be unwilling to
accept if he were ahead, because the former (but not the latter) constitute a
potential means to fulfilling this preference. Again, the behavior in question would
only count as a case of honoring sunk costs in the narrow sense if neither this
nor any similar preference were operative.
In sum: although we often observe individuals “throwing good money after
bad”, the hypothesis that these individuals are honoring sunk costs in the
narrow sense is greatly underdetermined by the behavioral evidence that is
typically available. [26] That is, some reason which is independent
of a desire to save expected utility theory as an adequate descriptive theory of
human action. [27] For helpful thoughts on earlier versions
of this material, I am grateful to Derek Parfit, Robert Nozick , Noah Feldman,
Luca Ferrero, and an anonymous referee for Nous. For generous financial support, I am
grateful to the Society of Fellows at Harvard
University. The claim that it is
characteristic of rational decision-making to ignore sunk costs is naturally
cast as the claim that ignorance of sunk costs is no handicap with
respect to decision-making.
Famously, John Rawls held that the subject of justice could be
illuminated by considering the deliberations of self-interested agents situated
behind a veil of ignorance, a veil which effectively shields them from
information which (Rawls held) could only have a distorting influence on their
judgements (1972, especially pp.17-22).
We might attempt to mimic Rawls’
procedure and illuminate the subject of sunk costs by considering the position
of agents situated behind another veil of ignorance, a veil which effectively shields
them from information about past investments in various courses of
action.
Let us make the
thought experiment more concrete.
Imagine that we possessed a pill which had the following peculiar
property. Upon taking the pill, an
agent who is faced with a choice between alternative actions A1...An immediately
forgets any past investments (either on her own part or on the part of others)
in any of the alternatives under consideration. This state of forgetfulness persists for
the duration of her deliberations; once a decision has been made, the relevant
memories immediately return. Here
is a (rough) suggestion for making vivid the doctrine that rationality requires
that sunk costs be ignored. The theorist who counsels that sunk costs should be
ignored might insist that an agent who decides upon a course of action while
under the influence of the pill is in at least as good of a position to
make the correct decision as she would be if she were not under its
influence. Indeed, such a theorist
might insist that the agent is in a better position to make the
correct decision while under the influence of the pill, inasmuch as she does not
run the risk of being unduly influenced by irrelevant factors. The perfectly rational decision
maker--one who, among other things, consistently gives no weight to sunk
costs--would make the same decision regardless of whether she was on the
pill. Alternatively: the perfectly
rational decision maker who makes a decision while under the influence of the
pill would never regret her decision, simply because the relevant
memories have returned.
However, the doctrine
that sunk costs should be ignored is not perfectly captured by the claim that
there is no disadvantage to pill-influenced decision-making. The theorist who claims that rationality
requires the ignoring of sunk costs might consistently agree that, in certain
circumstances, choosing behind the envisaged veil of ignorance is
disadvantageous. What are those
circumstances?