- “Portugal is not a small country.” Afonso Ramos, History Workshop
- “Japan’s frank and uncomplicated relationship to pleasure offered them an attractive alternative.” David Chaffetz, Asian Review of Books
- Getting intimate with America’s only bachelor president Susan-Mary Grant, History Today
- “In short, give into death;” Micah Mattix, American Conservative
The advocates of the sunk cost fallacy state that, since an agent ponders in his decisions marginal costs against marginal incomes, any consideration upon sunk costs would be irrational. Notwithstanding, as soon as we accept the arguments of the said sunk cost fallacy and try to put its recommendations into practice, we discover that we have just become an easy prey of a more severe kind of irrationality: the one that concerns with intransitive preferences.
Jon Elster exemplifies the sunk cost fallacy with the case of a huge snowfall that pours onto the city the very same day we were planning to attend a theatre play whose tickets we had bought the previous days and are not refundable. Elster points out that, since our attendance to the play will not bring the money we had paid for the tickets back, there is no reason to make the decision on whether or not to attend the play on the basis of the sunk costs of the tickets. The correct reasoning should take into account only the cost of enduring the heavy snowfall in order to reach to the theatre where the play would be performed. Nevertheless, the same Jon Elster makes the disclaimer that a zealous observance of avoiding the sunk cost fallacy could lead to make choices following non transitive preferences.
If we change our mind every day, discarding previous decisions and assuming a new direction just because a new opportunity has arisen, we risk to end up in the ruin. Transitive preferences tend to assure the agent of a certain profit and non transitive ones exposes him to losses. In evolutionary games simulations, agents who act according to transitive preferences outshine agents who do not. It seems, then, that the rational agents walks on the edge of the razor, between sunk cost fallacies and non transitive preferences.
That is why there is not such a thing as a sunk cost fallacy. The rational agent, to be such, must ponder a whole plan against an alternative plan in a whole as well, which in some cases, both of them last several periods of time. It is true that in the “very short term” all past costs are sunk and that it only matters the opportunity costs, but most decisions are made in the short term, which lasts more than just a moment. Otherwise, the very concept of transitive preferences would lack any meaning.
Of course certain costs are sunk: if the flux of earnings that a good of capital produces just covers the variable costs of putting it to work (for example, a truck whose earnings just pay for the gas and the salary of the driver), the more rational choice is to use it until it becomes full obsolete and do not replace it with a brand new unit.
But the sunk cost fallacy does not provide a criterion to distinguish sunk costs from just mere costs of a single plan. What a rational agent with transitive preferences discards in his considerations will be named sunk costs, and what he does not, will not. A pure tautology.
Even the snowfall case does not explain satisfactorily the said fallacy: when the agent bought the tickets, their cost were inferior to the income of watching the play, but a heavy snowfall adds not a marginal cost but increases the marginal cost of the plan composed by the cost of the tickets plus the cost of enduring the snowfall.
Notwithstanding, the sunk cost fallacy derives into a philosophical puzzle: what is the subject? How are relations between time and being and between being and becoming. It seems that our permanence as rational agents depends mostly upon not to put into practice the opportunistic approach of the sunk cost fallacy ad libidum.
Moreover, the matter has a political strand: constitutional constraints demand from the authorities to take into account the weight of certain principles in their decisions and those principles could be disregarded if the decisions are purely made on the basis of expediency. If it is the same authority the one who decides whether certain constitutional principle should be followed or not, then all the citizens would be left exposed to arbitrariness.
The considerations about the length of the period a plan should last, the responsibility upon the consequences of our past choices, and the weight of the constitutional principles on the legitimacy of political decisions, become rational if they are not pondered by an isolated agent but in the framework of the interplay among several agents.
This framework of human interaction upon which the agent’s choices take place had been characterised by Friedrich A.Hayek as a spontaneous, or abstract or extended order. He proposed to leave the term “economics” to the explanation of the choices made by an isolated agent and to establish the science of “catallaxy” as the study of the complex phenomena involved in the said structure of interactions. In the same line, James M.Buchanan labelled the interplay of individual agents as “symbiosis” and proposed to redefine the task of the political economy to its study. More recently, in 2009, Douglass C. North, John Joseph Wallis and Barry R. Weingast, in Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, coined the term “open access orders” to analyse the same set of events. To this stream of thought, it also belongs Vernon L. Smith’s own account of the concept of ecological rationality.
Catallaxy, Symbiosis, Complex Phenomena, and Open Access Order or Ecological Rationality are some of the aspects of what Karl Popper once called “critical rationalism” and supersedes old problems such as those of the instrumental or subjective reason. An authentic “toolbox,” ready to be used.
I was very fortunate to learn that my essay ‘Markets for rules‘ has won the Mont Pelerin Society’s 2018 Hayek essay competition for young scholars (one of the perks of academia is being defined as young well until your 30s). I am now looking forward to presenting at MPS’s famous conference, originally organised by F.A. Hayek to build the post-war intellectual case for liberalism.
The essay is an attempt to explain the governance possibilities of blockchain technology through the lens of new institutional economics and more specifically private governance. Blockchains allow people to develop rules that can then be enforced autonomously by the participants that use them without further central direction. This could allow communities to rely more on common rules and less on formal coercive authorities to achieve widespread social cooperation. I am cautiously optimistic about the technology (it could also turn into a dystopian nightmare) though not any particular currently existing blockchain.
Here is the abstract: Classical liberals seek the paradoxical: government powerful enough to protect individuals from preying off each other, but limited enough to prevent it becoming a fierce predator itself. The emergence of blockchain technology heralds a potential revolution in our collective capacity to implement limited government. Blockchains offer a more secure and transparent way of implementing rules while permitting individual choice between rulesets that can co-exist at the same time and place. What this could ultimately mean is that a great deal of what we have traditionally conceived to be governance might be disintermediated from the territorially defined monopolistic coercive authorities that classically define states.
A week ago a white supremacist rally in Charlottesville protesting the taking down of Confederate Memorial statues turned fatally violent. Other protests were due to take place this weekend in multiple U.S. cities, including New York (now postponed). How should citizens and public authorities deal with this upsurge in violent neo-Nazi protest? I am with Tina Fey on this one: don’t show up, have some cake, and encourage the NYPD to prevent violence.
Some on the left have tried opportunistically and mistakenly to associate Virginian school public choice scholarship with the far-right. This is a sadly missed opportunity because James Buchanan’s theory of club goods helps explain how far-right street protests emerge and suggest how authorities might best subdue them. I draw on John Meadowcroft’s and Elizabeth Morrow’s analysis of the far-right English Defence League (EDL).
Jeffrey Friedman has a well-argued piece on interpreting public choice in the wake of Nancy MacLean’s conspiratorial critique of one of its founding theorists, James Buchanan. While agreeing that MacLean is implausibly uncharitable in her interpretation of Buchanan, Friedman suggests that many of Buchanan’s defenders are themselves in an untenable position. This is because public choice allows theorists to make uncharitable assumptions about political actors that they have never met or observed. In this sense, MacLean is simply imputing her preferred own set of bad motives onto her political opponents. What is sauce for the goose is good for the gander.
I think Friedman’s arguments are a valid critique of the way that public choice is sometimes deployed in popular discourse. A lot of libertarian commentary assumes that those seeking political power are uniquely bad people, always having self-interest and self-aggrandisement as their true aim. Given that this anti-politics message is associated with getting worse political leaders who are becoming progressively less friendly to individual liberty, this approach to characterising politicians seems counterproductive. However, I don’t think Friedman’s position is such a good fit for Buchanan himself or most of those working in the scholarly public choice tradition.