Suffering from drowning costs AIER

Economists emphasize the importance of the concept of opportunity spending. Faced with the inevitable reality of scarcity, we emphasize the need to give up something valuable for every choice (such as “there is no such thing as a free lunch”). We also emphasize margin thinking, which reflects the fact that the most valuable option offered by the decision maker is the cost of opportunity (as well as many other ways). Recognizing the relevant margins and the relevant costs of choice better can reduce both our own confusion and our susceptibility to misrepresentation of others.

Unfortunately, like many economies, opportunity costs The idea An obvious logical minus from the lack, but its Application The complex, uncertain, and ever-changing real world is often very demanding (a point I emphasized on the first day of my economics policy class, entitled “Economics is both embarrassingly easy and very difficult”).

One of the drawbacks is that it may be easier to ignore the relevant costs, or to consider the ones that are not actual costs. As the economist Paul Hein once said, “the most common mistake” when it comes to thinking about costs is “confusing spending with marginal spending.”

A helpful reminder of this score, which is often displayed in economics textbooks and classrooms, is “sunk costs have sunk.” What has already happened and in the past cannot be changed by the present decision. It’s history, and your choices can only affect the present and the future. As a result, it is a mistake to argue that sinking costs are relevant to current preferences. Yet this problem often comes up, placing a significant price tag on such errors. This makes it possible to explain the principle in practice.

A common and very common example involves people who pay extra for an asset (discovered after the real one), but then refuse to sell it because they “can’t afford the loss.” The reality is that they bear the cost when they are committed to the wrong choice. Selling that asset later doesn’t impose a loss এটি it’s just wrong and reveals its dimensions.

That mistake can also apply to our personal lives. For example, some people are so overwhelmed with guilt about past actions that they give up trying to make things better. Others may get so tunnel-vision about the past that they give up their present and future in vain attempts to remove the past or avenge past wrongs that cannot be changed, the former post. In contrast to these two possibilities, it is good to remember that what is in the past and is now unchangeable does nothing to hinder our ability to apologize, to forgive, and to begin to make past mistakes now.

More generally, the importance of sinking costs is reflected in their spending chapters in economics textbooks. They all talk about the difference between marginal cost and average cost, where the main point is that marginal costs are relevant to changes in the behavior of sellers, since these changes occur in margins, but they can be very different from average costs. As a result, the average cost is often a confusing guide to what is a marginal choice.

The difference between the marginal cost and the average cost of a short-term treatment of a textbook is the average fixed cost. These fixed costs are costs that will be borne regardless of the output as long as the firm is in operation. So as long as the firm continues to work, they have already committed costs. As a result, they are irrelevant to the choice of how much to produce. However, whether they stay in business is relevant to their long-term choices, because going out of business can eliminate them (which economists often remind students that “all costs are variable in the long run.”). So the main use of the average is to look to the past to learn how past choices have turned out and hopefully, but in Heine’s words, “economic decisions are always made with the future in mind.”

When dealing with sinking costs, there can be some complex issues with dealing with how many costs have actually sunk. If all the costs I have already committed are completely irreparable, they are all sunk. But if those costs are included, say, buying property or equipment for the project? Some of these costs will be recoverable, as the property may be resold to others, perhaps for very different uses, and the equipment may be resold to others for similar uses or scrap.

There are also issues that are often referred to as costs, especially in the case of policy choices, as a justification for decisions, compensation, guilt, etc., rather than the policies used in making choices. In such cases, those involved are motivated to misrepresent the cost in their interest. Say I run a hospital provided by an insurance company based on my expenses. In fact, the costs really figure out to be the same for both of them. Such special appeal is more common in political decision making. If I try to shill for a policy, I want to maximize the costs involved with the option to create my case, which serves as an open invitation to include all sorts of irrelevant costs to paddle to my preferred numbers.

Understanding how drowning costs can be treated, I hope I have made clear here with my brief references, can be an important help in making more effective decisions. But as my own experience has taught me, it can be difficult to do consistently. Despite my frequent “advocacy” to properly address my training as an economist and the cost of opportunities to students (including ignoring the drowning costs of current decision making), I have failed to implement it. If confession is “good for the soul” or if it is helpful in helping others to avoid such “sin,” consider me.

I was attending an event that lasted about 3 hours. While there, I kept thinking about another event at the same time that I wanted to attend. Thinking about what I already decided not to do has ruined my joy in what I was doing.

Later (only after a period of time, which is often when we discover the things of life), I felt that I could not go to another event from where I was, or even left immediately, so that it was no longer possible. . Therefore, the standard I set for attending another event by staying where I was was no longer waived. It was an opportunity to decide where to go when I made that choice. But later, it was a drowning cost, and no longer relevant. Yet I have acted in such a way that it is still relevant, hurting myself in the process.

Despite my training, I have made this inevitable drowning-cost error more than once. For example, when working with family or taking breaks, my workaholic nature often whispers to me that I have a lot to do and should be in it. Yet focusing on what I have already chosen to give up imposes costs without any similar benefits. I should ignore those whispers representing irrelevant drowning costs at the present time. Even if I choose the “wrong” option, I’ve already borne the cost. I can benefit from learning from my mistakes in the future, but being bothered today about a choice I have already made has further complicated my mistake.

This difficulty can also help explain to people who “know the value of everything but know nothing.” To the extent that people tend to think of a pre-existing cost of choice once it is created, it can reduce the enjoyment that comes out of almost any experience, which can be a serious problem.

Understanding how to understand and apply dip costs is important in many ways. And one of the ways is to recognize that when we make mistakes in such endeavors, we can’t fix those mistakes in advance, but we can use them to learn better. So I used self-imposed “cognitive therapy” to stop letting thoughts of drowning cost reduce my enjoyment of life (which made me think the other way around, such as the difference between skilled guilt – which inspires future change, so that there are benefits as well as costs.) -And incompetent guilt-which makes us feel bad, but does not inspire change, so that there are costs but no benefits). I hope that sharing my understanding, and my own difficulties with consistent application, can help others avoid their own drowning cost-induced suffering.

Gary M. Gals

Gary M. Gals

Dr. Gary Galles is a professor of economics at Pepperdine.

His research focuses on the role of independence, including public finance, public choice, firm theory, industry organization, and the views of many classical liberals and American founders.

His books are included The path to policy failure, Defective premises, Bad policy, Messenger of peaceAnd Line of Liberty.

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