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How Not to Fall for the Sunk-Cost Fallacy – Article by T. Norman Van Cott

How Not to Fall for the Sunk-Cost Fallacy – Article by T. Norman Van Cott

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The New Renaissance HatT. Norman Van Cott
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My wife and I frequently vacation near Asheville, North Carolina. Perhaps it’s the economist in me, but an interesting spot that I visit is the Western North Carolina Farmers’ Market. The WNC market is large (36 acres) with vendors selling every seasonal fruit and vegetable item you can imagine. Georgia and South Carolina peaches are always a highlight. Therein lies the basis for a teachable moment in economics.

Chasing Peaches

While returning to Indiana one year, we decided to stop at the market to buy peaches for ourselves and friends. Going west on I-40, we exited for the market. Turning left, we took the bridge over I-40 toward our intended exit. Since the on-ramp for I-40 east and the entrance to the market are not that far apart, we accidentally missed our exit. That was about a 6 mile mistake for me. Unavoidable costs should not figure in the decision about whether to pursue peaches.

By the time we had gotten back to the exit for the WNC market, the question arose whether we should (try again to) buy peaches. I pointed out to my wife that had we known the first time that getting to the peaches was going to entail an additional 6 or so miles of driving, we might not have ever tried to stop.

However, the gasoline, traffic delay and self-incriminating frustration associated with the 6 mile mistake were what economists call “sunk costs.” That is, there was no way to avoid them at that point. Being unavoidable means they should not figure in the decision about whether to pursue peaches. The only costs that matter at that point are the costs of exiting a second time, not both times. So we exited, bought peaches, and continued on our way.   

In retrospect, the net benefits of the peaches were less than what initially motivated us to try to buy them. The net benefits could actually have been negative, but had we not exited the second time, the loss would have been greater!

Sunken Soybeans

Let’s consider another example. Living in rural Indiana, I’ve heard farmers complain at harvest time about how the price of corn and soybeans has fallen so much during the summer. Seeing as they’re going to lose money for the year, “why even harvest” is the lament of some. This is bad thinking. At harvest time many of the costs associated with their crops are “sunk.” That is, the cost of the seed, pesticides, herbicides, fuel, etc. associated with getting to harvest time has already been incurred. Nothing can be done to get that investment back so it should be ignored. The only costs that matter at harvest time are the costs of harvesting itself. The only issue is whether lower prices will cover these costs.

When it comes to tax time those costs, previously labeled sunk at harvest time, suddenly become important in figuring farmers’ taxable income. The accountant is going to want to know them. Moreover, the IRS is going to be interested in their accuracy.

The following spring yields yet another issue. Those seeds, pesticides, herbicides, and fuel costs that didn’t matter last fall now matter, and not just for tax reasons. With planting not yet started, these costs are no longer sunk because they have yet to be incurred. If expectations are that the coming fall is to be a repeat of the previous fall, the farmers will be planting something different than corn and soybeans in the coming spring.

Sunk Costs Might Cost You a Championship

One final example. As a sports fan I have long noted the gargantuan salaries with multi-year, guaranteed contracts for professional baseball and basketball players. What’s interesting is the responses of team owners and general managers when “their” players perform below expectations. More often than not the owner or general managers will say something like “this guy’s contract means we’re paying him umpteen thousands of dollars for this season, so we have to play him to get our investment back.” Another case of bad thinking. Don’t put a bad player in the game just because you paid for them.

The player’s salary for the duration of his contract is a sunk cost. It has to be paid regardless of whether the player plays; it therefore shouldn’t figure in the decision about how much play time needs to be utilized from the player. What matters at this point is whether you can find somebody who can play better. If your favorite team(s) have owners and general managers who think sunk costs matter, I recommend you switch your allegiances.

I’ll admit that ignoring sunk costs is difficult to do. It seems like people have an innate desire to include them in their business and household decisions. But doing so can result in less than optimal decisions, which can include not being able to enjoy those large, juicy Georgia and South Carolina peaches.

T. Norman Van Cott; Economics
T. Norman Van Cott; Economics
T. Norman Van Cott

T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott’s current research is the economics of constitutions.

This article was originally published on FEE.org. Read the original article.

The Two-Party Crackup Could Be Upon Us – Article by Stephen Weese

The Two-Party Crackup Could Be Upon Us – Article by Stephen Weese

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The New Renaissance HatStephen Weese
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Imagine living in a world where there are only two choices. Chocolate or vanilla. Hot or cold. Light or darkness. There are no in-betweens. No “shades of gray.” You must explain everything as a “yes or no” dichotomy. On or off. False or true. This binary reality leaves little room for human diversity or creativity – yet it is in this exact reality we find ourselves trapped with the US political system.

Prelude to Deception

The parties are divided and their candidates are weak.It all starts with a sociological phenomenon created due to our political election process. First Past the Post means that in our elections, winner takes all and the loser gets nothing. We are told that if we do not vote for one of the two major parties, our vote is wasted. (I mathematically analyzed this myth in a previous article.)

The concept that underlies the two party phenomenon is not only mathematical in principle, it is sociological. Duverger’s law assumes that people faced with more than two choices in a First Past the Post election will vote against the most radical or undesired opponent, instead of for the candidate they most desire. This demonstrates what is called a “negative” vote – it could be more precisely described as a vote made out of fear of the worst candidate.

Another principle of Duverger’s law is that it filters out “weaker” parties in that people will not vote for a party that has no chance of winning. This weakness is only psychologically defined; a party could appear weaker simply due to less publicity. Certainly a third party could have better ideas than the main two – but if the ideas are not heard, then no one can know about them. The purely cognitive illusion that there are only two “worthy” parties is perpetuated by lack of media coverage and the false appeal to common practice that it’s the “way things always have been done.”

The simple truth is, Duverger’s law depends on the psychological basis of fear and ignorance. Without these factors in society, the mathematical differences would disappear.

The Two Major Parties are Weak

People only think of politics as “right” or “left” because this is all they have ever known.At this point, the two major candidates for election, Donald Trump and Hillary Clinton, have historically high negative numbers. In fact, the two frontrunners have the highest unfavorable ratings since those numbers have been tracked: Trump is net negative 33, and Clinton negative 21.

More voters see these candidates in an unfavorable light than a favorable one. This would be a perfect time for the rise of a third party, even according to Duverger’s law. It only takes a cursory look at the news to see the large anti-Trump movement among major Republicans as well as the staunch Sanders wing of the Democratic party. The parties are divided and their candidates are weak, as shown by the polls above.

The Electorate Is Polarized

If you have the feeling that in the last decade partisan politics has become more extreme and vitriolic you’d be correct – Pew research has been tracking this phenomenon. Both the extremity of Democratic and Republican views have increased, as well as dislike and intolerance for the “other” party. At this point, 92% of Republicans are to the right of the median Democrat, and 94% of Democrats are to the left of the median Republican.

There are double the amount of pure liberals and conservatives than a decade ago, and the fear of the opposing party has doubled as well. Twice as many people think that the alternate party threatens the “nation’s well-being.”

If people could overcome the fear of the “worst” candidate and voted for what they believed in, the facade would begin to crumble. This polarization affects people’s choices of where to live, shop, and travel, and even goes to the extent of opposition to a family member marrying someone of the opposing party. The Pew study also shows that those on the extreme ends of the spectrum are the most politically active – writing letters, posting on social media, travelling to political events (though this is hardly surprising.) The effect of this of course is that these parties are represented more by their extreme elements.

This polarization also results in one-dimensional thinking. People only think of politics as “right” or “left” because this is all they have ever known. As humans, are we only one-dimensional? Aren’t there more ways to look at solving the problems of a nation than just left and right?

Most of us are trapped in this one-dimensional illusory world, like a train stuck on a single track. The mere idea that we could travel in a completely different direction is a foreign concept. Even a middle-school student can tell you that we live in a world with three dimensions, that we can travel in an infinite variety of paths. Yet we find ourselves confined to this oversimplified model of reality that goes counter to our interests and only allows us choices that leave most dissatisfied.

Majority in the Middle

Another effect of this polarization is that moderate Americans find themselves in the middle of this extremism. Most voters do not view the other party as a threat to the nation and are not 100% liberal or conservative in their views. There are actually more people in the middle, yet they find themselves forced to choose to side with one extreme or the other. In 2014, the “mixed” electorate (holding views from both sides) was 39%.

There are less of them now, due to extremism, yet this 39% in the middle is enough to completely take over an election, if they only had a different option to choose from. Unfortunately, the Pew data also shows that the people in the middle are less likely to vote and participate in the election process. Duverger’s law is working here because these moderates do not know that they are a huge bloc that could elect a moderate candidate with ease.

Overcoming Ignorance and Fear

We live in the age of new media – a social movement can begin online without the backing of a major television or news network. As we have seen, voting tendencies in our system are predicated on fear of a radical candidate as well as ignorance of third-party platforms or even their existence. This is the one-dimensional illusion we live in. If we continue to be more polarized, more and more of the electorate will hate the other half.

If nothing stops this progress, those in the middle will be forced to choose a side as the tolerance for opposing views decreases. Others could stand up and speak and become a driving force pulling opinions back toward some sense of centrism – or even better, they could propose ideas outside of the traditional “left vs. right” paradigm.

The truth is, if people could overcome the fear of the “worst” candidate and voted for what they believed in, the facade would begin to crumble. If the media and others covered third parties more, unaligned voters – for example, people who believe in peace and freedom – would have a new incentive to participate and give a positive vote.

Fortunately, we now live in the age of new media – a social movement can begin online without the backing of a major television or news network. This election is the most opportune time for this to happen given the record negative views of both candidates. Thus it behooves the unaligned voter to find her or his voice in this election. If these voters together decided that “enough is enough” and realized that they are actually the most powerful voting bloc, they could simply say “no” to the two major parties – and nothing could stop them.

Stephen_WeeseStephen Weese

Stephen Weese has an undergraduate degree in Computer Science from George Mason University, and a Masters in Computer Information Technology from Regis University. Stephen teaches college Math and Computer courses. He is also a speaker, a film and voice actor, and a nutrition coach.

This article was originally published on FEE.org. Read the original article.

 

Natural Disasters Don’t Increase Economic Growth – Article by Frank Hollenbeck

Natural Disasters Don’t Increase Economic Growth – Article by Frank Hollenbeck

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The New Renaissance Hat
Frank Hollenbeck
May 27, 2014
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Hurricane season is nearly upon us, and every time a hurricane strikes, television and radio commentators and would-be economists are quick to proclaim the growth-boosting consequences of the vicissitudes of nature. Of course, if this were true, why wait for the next calamity? Let’s create one by bulldozing New York City and marvel at the growth-boosting activity engendered. Destroying homes, buildings, and capital equipment will undoubtedly help parts of the construction industry and possibly regional economies, but it is a mistake to conclude it will boost overall growth.

Every year, this popular misconception is trotted out although Frédéric Bastiat in 1848 clearly put it to rest with his parable of the broken window. Suppose we break a window. We will call up the window repairman, and pay him $100 for the repair. People watching will say this is a good thing. What would happen to the repairman if no windows were broken? Also, the $100 will allow the repairman to buy other goods and services creating income for others. This is “what is seen.”

If instead, the window had not been broken, the $100 may have purchased a new pair of shoes. The shoemaker would have made a sale and spent the money differently. This is “what is not seen.”

Society (in this case these three members) is better off if the window had not been broken, since we are left with an intact window and a pair of shoes, instead of just a window. Destruction does not lead to more goods and services or growth. This is what should be foreseen.

One of the first attempts to quantify the economic impact of a catastrophe was a 1969 book, The Economics of Natural Disasters. The authors, Howard Kunreuther and Douglas Dacy, largely did a case study on the Alaskan earthquake of 1964, the most powerful ever recorded in North America. They, unsurprisingly, concluded that Alaskans were better off after the quake, since money flooded in from private sources and generous grants and loans from the federal government. Again, this was “what is seen.”

While construction companies benefit from the rebuilding after a disaster, we must always ask, where does the money come from? If the funds come from FEMA or the National Flood Insurance Program (NFIP), the federal government had to tax, borrow, or print the money. Taxpayers are left with less money to spend elsewhere.

The economics of disasters remains a small field of study. There have been a limited number of empirical studies examining the link between growth and natural disasters. They can be divided into studies examining the short-term and long-term impact of disasters. The short-term studies, in general, found a negative relationship between disasters and growth while a lesser number of long-run studies have had mixed results.

The most cited long-run study is “Do Natural Disasters Promote Long-Run Growth?” by Mark Skidmore and Hideki Toya who examined the frequency of disasters in 89 countries against their economic growth rates over a 30-year period. They tried to control for a variety of factors that might skew the findings, including country size, size of government, distance from the equator and openness to trade. They found a positive relationship between climate disasters (e.g., hurricanes and cyclones), and growth. The authors explain this finding by invoking what might be called Mother Nature’s contribution to what economist Joseph Schumpeter famously called capitalism’s “creative destruction.” By destroying old factories and roads, airports, and bridges, disasters allow new and more efficient infrastructure to be rebuilt, forcing the transition to a sleeker, more productive economy. Disasters perform the economic service of clearing out outdated infrastructure to make way for more efficient replacements.

There are three major problems with these empirical studies. The first is counterfactual. We cannot measure what growth would have been had the disaster never occurred. The second is association versus causation. We cannot say whether the disaster caused the growth or was simply associated with it.

The third problem is what economists call “ceteris paribus.” It is impossible to hold other factors constant and measure the exclusive impact of a disaster on growth. There are no laboratories to test macroeconomics concepts. This is the same limitation to Rogoff’s and Reinhart’s work on debt and growth, and many other bilateral relationships in economics. Using historical data from the early 1900s, researchers found that as the price of wheat increased, the consumption of wheat also increased. They triumphantly proclaimed that the demand curve was upward sloping. Of course, this relationship is not a demand curve, but the intersection points between supply and demand. The “holding everything else constant” assumption had been violated. In economics, empirical data can support a theoretical argument, but it cannot prove or disprove it.

So what do we do if the empirical studies have serious limitations? We go back to theory. We know a demand curve is downward sloping because of substitution and income effects. Wal-Mart does not run a clearance to sell less output! Theory also holds that natural disasters reduce growth (i.e., the more capital destroyed, the greater the negative impact on growth).

More capital means more growth. Robinson Crusoe will catch more fish if he sacrifices time fishing with his hands to build a net. Now, suppose a hurricane hits the island and destroys all of his nets. Robinson could go back to fishing with his bare hands and his output would have been permanently reduced. He could suffer an even greater decline in output by taking time to make new nets. The Skidmore-Toya explanation is to have him apply new methods and technologies to build even better nets, allowing him to catch more fish than before the hurricane. Of course, we may ask, if he had this knowledge, why didn’t Robinson build those better nets before the hurricane? This is where the Skidmore-Toya logic falls apart. Robinson did not build better nets before the hurricane because it was not optimal for him to do so.

If a company decides to replace an old machine with a new one, among the primary considerations are the initial price of the new machine, the applicable interest rate, and the reduced yearly costs of operation of the new machine. Using net present value analysis, the company determines the optimum time to make the switch (a real option). A hurricane forces a switch to occur earlier than would have been optimal under a price and profit motive. The hurricane therefore created a different path for growth. The creative destruction would have occurred, but on a different, more optimal, timeline.

The same conclusions can also be drawn from manmade disasters. Contrary to what many Keynesian economists would have you believe, WWII did not grow the US out of the great depression. Capitalism did!

Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Transhumanism and Mind Uploading Are Not the Same – Video by G. Stolyarov II

Transhumanism and Mind Uploading Are Not the Same – Video by G. Stolyarov II

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In what is perhaps the most absurd attack on transhumanism to date, Mike Adams of NaturalNews.com equates this broad philosophy and movement with “the entire idea that you can ‘upload your mind to a computer'” and further posits that the only kind of possible mind uploading is the destructive kind, where the original, biological organism ceases to exist. Mr. Stolyarov refutes Adams’s equation of transhumanism with destructive mind uploading and explains that advocacy of mind uploading is neither a necessary nor a sufficient component of transhumanism.

References
– “Transhumanism and Mind Uploading Are Not the Same” – Essay by G. Stolyarov II
– “Transhumanism debunked: Why drinking the Kurzweil Kool-Aid will only make you dead, not immortal” – Mike Adams – NaturalNews.com – June 25, 2013
– SENS Research Foundation
– “Nanomedicine” – Wikipedia
– “Transhumanism: Towards a Futurist Philosophy” – Essay by Max More
– 2045 Initiative Website
– Bebionic Website
– “How Can I Live Forever?: What Does and Does Not Preserve the Self” – Essay by G. Stolyarov II
– “Immortality: Bio or Techno?” – Essay by Franco Cortese

Transhumanism and Mind Uploading Are Not the Same – Article by G. Stolyarov II

Transhumanism and Mind Uploading Are Not the Same – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
July 10, 2013
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In what is perhaps the most absurd attack on transhumanism to date, Mike Adams of NaturalNews.com equates this broad philosophy and movement with “the entire idea that you can ‘upload your mind to a computer’” and further posits that the only kind of possible mind uploading is the destructive kind, where the original, biological organism ceases to exist. Adams goes so far as calling transhumanism a “death cult much like the infamous Heaven’s Gate cult led by Marshal Applewhite.”

I will not devote this essay to refuting any of Adams’s arguments against destructive mind uploading, because no serious transhumanist thinker of whom I am aware endorses the kind of procedure Adams uses as a straw man. For anyone who wishes to continue existing as an individual, uploading the contents of the mind to a computer and then killing the body is perhaps the most bizarrely counterproductive possible activity, short of old-fashioned suicide. Instead, Adams’s article – all the misrepresentations aside – offers the opportunity to make important distinctions of value to transhumanists.

First, having a positive view of mind uploading is neither necessary nor sufficient for being a transhumanist. Mind uploading has been posited as one of several routes toward indefinite human life extension. Other routes include the periodic repair of the existing biological organism (as outlined in Aubrey de Grey’s SENS project or as entailed in the concept of nanomedicine) and the augmentation of the biological organism with non-biological components (Ray Kurzweil’s actual view, as opposed to the absurd positions Adams attributes to him). Transhumanism, as a philosophy and a movement, embraces the lifting of the present limitations upon the human condition – limitations that arise out of the failures of human biology and unaltered physical nature. Max More, in “Transhumanism: Towards a Futurist Philosophy”, writes that “Transhumanism differs from humanism in recognizing and anticipating the radical alterations in the nature and possibilities of our lives resulting from various sciences and technologies such as neuroscience and neuropharmacology, life extension, nanotechnology, artificial ultraintelligence, and space habitation, combined with a rational philosophy and value system.” That Adams would take this immensity of interrelated concepts, techniques, and aspirations and equate it to destructive mind uploading is, plainly put, mind-boggling. There is ample room in transhumanism for a variety of approaches toward lifting the limitations of the human condition. Some of these approaches will be more successful than others, and no one approach is obligatory for those wishing to consider themselves transhumanists.

Moreover, Adams greatly misconstrues the positions of those transhumanists who do support mind uploading. For most such transhumanists, a digital existence is not seen as superior to their current biological existences, but as rather a necessary recourse if or when it becomes impossible to continue maintaining a biological existence. Dmitry Itskov’s 2045 Initiative is perhaps the most prominent example of the pursuit of mind uploading today. The aim of the initiative is to achieve cybernetic immortality in a stepwise fashion, through the creation of a sequence of avatars that gives the biological human an increasing amount of control over non-biological components. Avatar B, planned for circa 2020-2025, would involve a human brain controlling an artificial body. If successful, this avatar would prolong the existence of the biological brain when other components of the biological body have become too irreversibly damaged to support it. Avatar C, planned for circa 2030-2035, would involve the transfer of a human mind from a biological to a cybernetic brain, after the biological brain is no longer able to support life processes. There is no destruction intended in the 2045 Avatar Project Milestones, only preservation of some manner of intelligent functioning of a person whom the status quo would instead relegate to becoming food for worms. The choice between decomposition and any kind of avatar is a no-brainer (well, a brainer actually, for those who choose the latter).

Is Itskov’s path toward immortality the best one? I personally prefer SENS, combined with nanomedicine and piecewise artificial augmentations of the sort that are already beginning to occur (witness the amazing bebionic3 prosthetic hand). Itskov’s approach appears to assume that the technology for transferring the human mind to an entirely non-biological body will become available sooner than the technology for incrementally maintaining and fortifying the biological body to enable its indefinite continuation. My estimation is the reverse. Before scientists will be able to reverse-engineer not just the outward functions of a human brain but also its immensely complex and intricate internal structure, we will have within our grasp the ability to conquer an ever greater number of perils that befall the biological body and to repair the body using both biological and non-biological components.

The biggest hurdle for mind uploading to overcome is one that does not arise with the approach of maintaining the existing body and incrementally replacing defective components. This hurdle is the preservation of the individual’s unique and irreplaceable vantage point upon the world – his or her direct sense of being that person and no other. I term this direct vantage point an individual’s “I-ness”.  Franco Cortese, in his immensely rigorous and detailed conceptual writings on the subject, calls it “subjective-continuity” and devotes his attention to techniques that could achieve gradual replacement of biological neurons with artificial neurons in such a way that there is never a temporal or operational disconnect between the biological mind and its later cybernetic instantiation. Could the project of mind uploading pursue directions that would achieve the preservation of the “I-ness” of the biological person? I think this may be possible, but only if the resulting cybernetic mind is structurally analogous to the biological mind and, furthermore, maintains the temporal continuity of processes exhibited by an analog system, as opposed to a digital system’s discrete “on-off” states and the inability to perform multiple exactly simultaneous operations. Furthermore, only by developing the gradual-replacement approaches explored by Cortese could this prospect of continuing the same subjective experience (as opposed to simply creating a copy of the individual) be realized. But Adams, in his screed against mind uploading, seems to ignore all of these distinctions and explorations. Indeed, he appears to be oblivious of the fact that, yes, transhumanists have thought quite a bit about the philosophical questions involved in mind uploading. He seems to think that in mind uploading, you simply “copy the brain and paste it somewhere else” and hope that “somehow magically that other thing becomes ‘you.’” Again, no serious proponent of mind uploading – and, more generally, no serious thinker who has considered the subject – would hold this misconception.

Adams is wrong on a still further level, though. Not only is he wrong to equate transhumanism with mind uploading; not only is he wrong to declare all mind uploading to be destructive – he is also wrong to condemn the type of procedure that would simply make a non-destructive copy of an individual. This type of “backup” creation has indeed been advocated by transhumanists such as Ray Kurzweil. While a pure copy of one’s mind or its contents would not transfer one’s “I-ness” to a digital substrate and would not enable one to continue experiencing existence after a fatal illness or accident, it could definitely help an individual regain his memories in the event of brain damage or amnesia. Furthermore, if the biological individual were to irreversibly perish, such a copy would at least preserve vital information about the biological individual for the benefit of others. Furthermore, it could enable the biological individual’s influence upon the world to be more powerfully actualized by a copy that considers itself to have the biological individual’s memories, background, knowledge, and personality.  If we had with us today copies of the minds of Archimedes, Benjamin Franklin, and Nikola Tesla, we would certainly all benefit greatly from continued outpourings of technological and philosophical innovation.  The original geniuses would not know or care about this, since they would still be dead, but we, in our interactions with minds very much like theirs, would be immensely better off than we are with only their writings and past inventions at our disposal.

Yes, destructive digital copying of a mind would be a bafflingly absurd and morally troubling undertaking – but recognition of this is neither a criticism of transhumanism nor of any genuinely promising projects of mind uploading. Instead, it is simply a matter of common sense, a quality which Mike Adams would do well to acquire.

Illiberal Belief #24: The World is a Scary Place – Article by Bradley Doucet

Illiberal Belief #24: The World is a Scary Place – Article by Bradley Doucet

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The New Renaissance Hat
Bradley Doucet
June 9, 2013
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Will the world end with a bang or with a whimper? Will terrorists shake the very foundations of civilization by setting off suitcase nukes in major world cities, or will the continuing contamination of the environment with toxic man-made chemicals give everyone on the planet terminal cancer? One way or another, the apocalypse, it seems, is just around the corner. Or is it?
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In fact, neither of these fears is anywhere near as threatening as many people believe them to be. Dan Gardner, columnist and senior writer for the Ottawa Citizen, has written a book called Risk: The Science and Politics of Fear, published last year and newly available in paperback, in which he tries to put such fears in perspective. According to Gardner, even factoring in the 3000 deaths from the unprecedented destruction of the World Trade Center in 2001, Americans are more likely in any given year to be unintentionally electrocuted than to be killed in a terrorist attack. Of course, the real fear is that terrorists will get their hands on nuclear weapons. But while this risk does exist, there are also very substantial obstacles that make such a scenario extremely unlikely. Even if, against all odds, a terrorist organization managed to detonate a nuclear bomb in a major American city, killing on the order of 100,000 people, this would be roughly equivalent to the number of Americans killed each year by diabetes, or by accidents, or by infections contracted in hospitals.As for the fear that toxic man-made chemicals are responsible for increasing incidences of cancer, it hides several misconceptions. For one, it implies that the natural is good and that the man-made is bad. In fact, most pesticides, for instance, are not man-made but occur naturally in the foods we eat. Our fear of toxic chemicals also tends to ignore any consideration of dose, since we tend to panic over insignificant parts per billion that are far below the thresholds found to kill lab rats. As toxicologists are fond of repeating, even water is poisonous in large enough quantities. The fear of environmental chemicals, natural or man-made, is also misplaced in that the American Cancer Society estimates they are responsible for only 2 percent of all cancers, as compared to lifestyle factors (smoking, drinking, diet, obesity, and exercise) that account for a whopping 65 percent. Finally, when adjusted for age and improved screening procedures, incidence rates for all cancers except lung cancer are actually declining, not increasing.
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The Great Riddle

Why are we so much more afraid of terrorism than diabetes? Why do we pay so much attention to minuscule environmental hazards while essentially ignoring much larger lifestyle risks? Contrasting Europeans’ blasé smoking habits with their outsized fear of genetically modified organisms, Gardner writes, “Surely one of the great riddles to be answered by science is how the same person who doesn’t think twice about lighting a Gauloise will march in the streets demanding a ban on products that have never been proven to have caused so much as a single case of indigestion.” To take just one more example, we fear statistically non-existent threats like child abduction and therefore keep our kids indoors, depriving them of exercise and contributing to sedentary lifestyles that have a very real chance of cutting years off of their lives.

The answers to this “great riddle” are partly to be found in human nature. We have gut reactions to dangers that are more dramatic, like terrorist attacks and plane crashes. These rare events also are more likely to make the news, both because of their drama and because of their rarity. Another thousand people died today from heart disease? Ho-hum. Fifty people died in a plane crash? That hasn’t happened in months or years, and the visuals are exciting, so that’s news!

Be Afraid… Be Very Afraid

Irrational fears not only lead us to make bad choices, like driving instead of flying, which place us in greater danger. They also allow government officials to manipulate us more effectively and insinuate themselves more deeply into more and more areas of our lives. The disproportionate fear of terrorism has been nurtured and used to justify a protocol of time-consuming security checks at airports, the warrantless wiretapping of phone calls, the tightening of international borders, and of course, two ongoing wars with huge costs both in terms of lives and money. The exaggerated fear of environmental dangers, for its part, has led to increased taxation and regulation of production, empowering bureaucrats and lobbyists while acting as a drag on innovations and economic growth that could be of even greater benefit to human life and flourishing. (See Gennady Stolyarov II’s “Eden Is an Illusion”.)

We are prone to fear all kinds of things we really shouldn’t, fears that can be and are reinforced by the media out to tell an entertaining story; by companies out to sell us an alarm system or a new drug; by activists or non-governmental organizations out to elicit donations and support; and by politicians out to win elections and accumulate power. The only way to counteract this is to inform ourselves about relative risks and becoming comfortable dealing with numbers and statistics in general.

There is no such thing as a risk-free world, but despite the real dangers that exist, we in the developed world in the twenty-first century are better off than any other people who have ever lived. We have our human ingenuity to thank for the startling advances in fighting diseases and increasing lifespans that characterize our time. We shouldn’t let our equally human irrational fears get the better of us and push us into giving up our freedom in exchange for ersatz safety.

Bradley Doucet is Le Quebecois Libré‘s English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.

Sunk Costs: There’s No Crying Over Spilled Milk – Article by Steven Horwitz

Sunk Costs: There’s No Crying Over Spilled Milk – Article by Steven Horwitz

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The New Renaissance Hat
Steven Horwitz
July 29, 2012
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Nobel Prize-winning economist James Buchanan is fond of saying, “It takes varied reiterations to force alien concepts on unwilling minds.” That aphorism is surely true. Many basic ideas in economics require repeated attempts at explanation, and a variety of applications, before people fully grasp them and their importance. The one I want to focus on today is the concept of sunk costs and the related sunk-cost fallacy.

Understanding the concept of sunk costs first requires that one understand that, for economists, what matters for decision-making is what we call “action on the margin.” By “the margin” we simply mean the action we will take with respect to the concrete choice before us. When deciding whether a particular choice is worth making, the economic way of thinking tells us to compare the additional benefits that will come from that choice to the additional costs it will entail. This type of thinking then counsels: “Choose the option that delivers the greatest net additional benefits.”

Focusing on the additional benefits and costs that come from that specific action is what economists mean by acting on the margin. To forestall one objection, I will point out that what counts as a benefit or cost is of course subjective to the chooser. You and I could be in the identical situations but appraise the costs and benefits differently, and thereby end up making different choices. Economics says nothing about what should count as a benefit or cost, only that, whatever one chooses to count as benefits and costs, one should focus on the additional, or marginal, benefits and costs of a particular option and go with the one delivering the greatest net marginal benefits.

Irrelevant for Next Decision

An implication of this point is that costs that have already been incurred and that will not change with any of the specific choices now at the margin should be irrelevant to one’s decision. These are what we call sunk costs: The resources cannot be recovered, hence the costs are sunk. Such sunk costs should not matter for one’s next decision; only the costs now at the margin of choice count. No matter what we choose next, we can’t change the fact that we spent those resources in the past.

The idea of the irrelevance of sunk costs is all around us in folk wisdom and other places. For example, good poker players understand the idea when they say, “Don’t throw good money after bad.” Sometimes novice players will think, “Well, I’ve already bet five dollars on this hand, so I might as well see it through.” Good poker players know this is bad thinking: What matters is whether your hand is worth making the next bet. That you’ve bet five dollars already is beside the point. Bygones are bygones. You can’t put the toothpaste back in the tube. There’s no crying over spilled milk.

People who understand the sunk-cost fallacy know to beware when they hear people use phrases like, “You should get your money’s worth” or “You should finish what you started.” For example, suppose you pay a hundred dollars for a gym membership and never use it. Someone says to you, “You really should go to the gym and get something for your hundred dollars.” The problem, however, is that the money is gone whether you go to the gym or not. The relevant question is whether on any given day the benefits of exercising are worth the costs of going to the gym (or giving up your next best alternative). That’s action on the margin. The money spent is irrelevant.

Additional Costs Worth It?

The same is true of the argument that we should “finish what we started,” say, in Afghanistan or Iraq. We can’t change the past and undo the deaths and financial costs of those wars. The real question is whether the benefits of continued intervention are worth additional costs, regardless of what happened in the past. Are billions more spent and many more dead Americans and their victims worth it for the supposed additional gains of continuing those wars?

Sunk costs are sunk. Eventually, of course, in facing new decisions, we can rethink the old decision that sunk those costs in the first place (such as, should we renew the gym membership, or should we enter a new war?). But until then, the past is irrelevant because whatever we choose, we can’t change it. What matters for the economic way of thinking is decision-making on the margin: the additional benefits and costs of the options in front of us right now.

Understanding that choice is always on the margin and that sunk costs are sunk can help you make better decisions in your personal life and spot fallacious reasoning by politicians. This is just another illustration that good economics is the key to critical thinking and good citizenship.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.