Wednesday, August 05, 2009

Runaway Train? - Freakonomics Blog -

The discussion from Freakonomics is about high-speed rail ways and the fear that once we begin down the track (sorry I could not resist) we will never consider the economics of it. That said, the following quote is a perfect example of why even die-hard classical economists (Thaler's "Econs") are admitting that behavioral finance/economics does play a role in decision making.

Runaway Train? - Freakonomics Blog -
"...thanks to a quirk of our psychology we humans are very loath to walk away from “sunk costs” no matter how much it is in our interest to do so. Economists counsel that past effort should not dictate future action: what’s done is done and all that matters is whether future benefits outweigh future costs; no point throwing good money after bad.

But in practice we find it very difficult to admit we were wrong, and we often feel that sunk costs should be left on the balance sheet when it comes to the calculus that determines our future actions. Indeed, great difficulties, which may indicate we should abandon an undertaking, may ironically make us more, not less, inclined to stick to our questionable course."

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