Thursday 20 December 2018

Sunk costs in politics

Sunk costs matter more in politics than in markets. They matter everywhere, but firms have better incentives to stop throwing good money after bad.

In politics, you have to keep throwing that money at things like the America's Cup because reversing would signal that you screwed up in the first place, and politicians expect voters to punish them more for admitting that than for just riding the damn thing out.

This was part of a longer thread from Auckland Councillor Richard Hills, some of which is now deleted.

Auckland Council voted to throw money at a yacht race - the America's Cup. And when it inevitably came back begging for more money, as everyone had to have known it would, "you can't stop half way... you're not going to stop it when you've spent so much."

I wish Councillors believed it politically possible to say 
"Know what? We should have foreseen this pitch for extra cash, but we believed them when they said that this time is different. Our bad. But we're not going to give them any more money. If they want to cancel their boat thing or take it elsewhere, that's their call. But we'll want all our money back if they do - and we will never ever again put a dime of public money into a boat race otherwise."
I'm not blaming Hills here - he notes that he'd tried taking more expensive options off the table. But it is a nice illustration of political thinking around sunk costs.

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