Wednesday, March 21, 2007

Sunk costs and marginal benefits

Economics teaches us that rationally, we should ignore sunk costs and instead focus on marginal benefits. (An example of this principle that I often use: you read a book halfway and discover it's utter crap. Do you finish it? This applies to any other good which is consumed slowly.) Yet what's often not added to that is that your sunk costs can dramatically affect your (perceived or non-perceived) marginal benefits. Once you've invested time into something it becomes more beneficial for you to continue then to start over again - at least in the short-run. The marginal benefit to continuing with philosophy and economics might have been, to apply a random number, 1 compared to the 2 of chemistry back then, but at this point I might have fallen behind to the point where that is no longer the case. Then again, obviously the marginal benefit to studying a hard science seemed lower to me then - I saw in economics and philosophy an overarching view of the world which encompasses everything. And I couldn't stand not knowing what that theory said. Now that I know the main theory, however, I should move on.

This is similar to a dilemma that I face. It might be more beneficial in the long-run for me to focus on something scientific rather than philosophy, but if I was to do that all my work towards philosophy would be wasted and I wouldn't get a philosophy degree. That philosophy degree might be useful. But what would certainly be useful is a mathematics, chemistry, or computer science degree. And at some level, shouldn't I take into account these sunk costs, especially if by investing these three years into philosophy I will forever be behind if I went to chemistry?

Firms face a dilemma with sunk costs. They have no way of knowing how much it will cost to research and implement expensive new technologies, nor what exactly the benefit will be, nor at what point the full benefits will appear. One can invest a huge amount of money into a project, then, citing economics, scrap it - only to find later that if you'd continued on the project you would have reaped enormous rewards. And the opposite can happen.

1 comment:

Cedric Morrison said...

Just take more math if you are worried about future employment and educational opportunities. It is related to what you currently are studying, and it applies to just about all science and social science if you ever go to grad school.