Thoughts arising from weekend reading: ‘Sunk Costs’ and the ‘Esau Problem’

The Review section of this Saturday’s Weekend Australian contained some material which I will reflect on here. First, a discussion of the sunk cost fallacy, and secondly a discussion of short-term thinking, which I label the Esau Problem.

Sunk costs

In an interview piece with actor, writer and now director Josh Lawson[1], Mr Lawson discusses how, once he had written the script to his new film The Little Death, his considerable investment in the project caused him to keep going with the production and see it through to final production.

The project gestated so long, the need to complete it became as pressing as Lawson’s desire to tell the story. “Initially, once I’d written it, it was just a movie. But because I invested so long in making it, after about four years – which was half the time it took to make it – then I really had to make it, it was a matter of principle,” he says.

“I’d invested too long and gone too far to give it up.”

This passage, and especially the last line, immediately brought to my mind the Sunk Cost Fallacy. This is the idea that it is better to continue a project into which one has ‘sunk’ considerable investments of resources – such as time and money – and so keep alive the possibility that the returns from the project might cover the cost of those resources, than to abandon the project and thus any hope of recouping a return.

The fallacy arises from failing to realize that the best thing to do at any moment is that which will produce the best outcomes from that moment, regardless of whatever costs may have been incurred in a particular project. As a result, people who have reasoned according to the sunk cost fallacy will continue to dedicate scarce resources to a project, not necessarily because it is the best use of their time and money, but because they can’t bear to see their previous work go to waste.

Mr Lawson’s persistence may turn out well: his film could be a box-office smash, and strike a chord with a large swathe of people, both here and overseas. On the other hand, the time he devoted to completing his project may have been better served on other projects, either for acting or directing. We don’t know, because we don’t know the options which were open to Mr Lawson.

But we do know that he based his decision on sunk costs. And that this is not an optimal way to allocate scarce resources.

Esau Problem

The ‘Esau Problem’ is the name that I give to the problem of short-term thinking – making decisions which solve an immediate problem, but at the cost of creating a larger and/or less-tractable problem in the future.

The name comes from the biblical character Esau, who, when he found himself famished, sold his birthrights to his brother, Jacob, for a bowl of lentil soup that his brother had prepared:

And Jacob cooked stew; and Esau came in from the field, and he was faint. And Esau said to Jacob: ‘Let me swallow, I pray thee, some of this red, red stew; for I am faint.’ Therefore was his name called Edom. And Jacob said: ‘Sell me first thy birthright.’ And Esau said: ‘Behold, I am at the point to die; and what profit shall the birthright do to me?’ And Jacob said: ‘Swear to me first’; and he swore unto him; and he sold his birthright unto Jacob. And Jacob gave Esau bread and lentil stew; and he did eat and drink, and rose up, and went his way. So Esau was contemptuous of his birthright. [The Bible, Genesis 25: 29-34]

The Esau problem is universal in human affairs, caused both by people’s paying too little attention to the longer-term consequences of their actions, and ‘discounting’ those consequences too heavily compared to the immediate consequences of their actions – behavior known to psychologists as hyperbolic discounting.

Troy Bramston’s review of Paul Kelly’s Triumph and Demise discusses two episodes of short-term thinking on the part of the Labor Party while it was in government.[2]

The first concerns the swift coup against Kevin Rudd which took place in June 2010:

Kelly judges the swift execution of Rudd to be an example of tactical genius but a strategic catastrophe.

Although I think Kelly’s use of the phrase ‘tactical genius’ refers to the way in which the coup was carried out, rather than the act itself, the example is nevertheless apposite. Some people within the Labor Party saw Rudd’s ongoing presence in the Lodge as a significant problem, and resolved to remove him. The coup thus solved this problem, but at the cost of losing the confidence of a significant swathe of voters, who couldn’t understand why Rudd had been removed. It also impaired from its beginning the premiership of his replacement, who the voters from then on marked down for her participation in the coup. As Kelly concludes:

The June 2010 leadership challenge “signed the death warrant of the Labor government”.

The second concerns Prime Minister Gillard’s forming an alliance with the Green Party, following Labor’s poor performance in the 2010 election.

When Gillard took up the climate fight post-2010, her alliance with the Greens ceded her authority and damaged Labor’s brand. It was a “rotten” deal for Labor. It is just one example of Gillard’s “tin-ear” for politics.

The deal was a poor one to begin with: the Greens were only ever going to support Labor, so why negotiate a deal with them in which Labor forfeited its strong hand and entered into electorally-unpopular agreements? The deal may have solved a problem perceived only by Gillard. But in any case, it was a strategic mistake.

Approaches to help avoid the Esau Problem might involve:

  • planning ahead, so that the need to take emergency actions which are costly in the longer term is reduced;
  • gaining a clear understanding of the short- and long-term consequences of the options that one has, so that they can be considered alongside one another; and
  • being aware of the problem of hyperbolic discounting, and seeking to counter it by bringing perspective to the decision – do we really need this thing now?

The aim is not so much to remove the effect of hyperbolic discounting on longer-term consequences – that would be difficult – but to lower the perceived value of the immediate benefit by questioning its value, and beginning the search for less-costly alternatives.

[1] Michael Bodey, ‘No crime in revealing the climax’, The Weekend Australian, September 20-21, 2014, Review, p.13.

[2] Troy Bramston, ‘The Australian Crisis’, The Weekend Australian, September 20‑21, 2014, Review section, pp.16-17.

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
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