Tuesday, December 1, 2009

Sunk-Cost Fallacy and its application to NFL


With Jamarcus Russel’s recent benching, there’s been a lot of talk about when it’s time for a team to cut its losses on a failed quarterback. I don’t have hard numbers at my fingertips, but I’d be fairly certain that if a QB isn’t playing above average football or there hasn’t been steady improvement, by the end of his second year, it’s time to move on. There’s no question teams tend to stick with struggling QBs well beyond their expiration date, even when better alternatives exist. The real question is, why?

Let’s say you’re an out-of-town Bills fan, and before the season began you were understandably optimistic about the team’s prospects. You bought prime tickets to the January 3rd game hosting the Colts, including parking and a hotel room. Altogether the bill comes to $400. In August, this feels like a great deal.

As the season wears on, it becomes clear the Bills aren’t contenders. The coach is fired, and the upcoming Colts game is not looking promising, as the Colts appear likely be playing for home field advantage in the playoffs. Everything points toward a humiliating blowout. What’s worse, as the game approaches the weather isn’t looking good. Bills fans are always the hardy type, but the foercast is beyond bad—snow, wind, freezing rain, and bitter cold. You’re not exactly excited about the prospect of going to the game.

A few days before the game, your friend invites you to watch the game at a party to inaugurate his new palacial home theater. You’d really rather do that than actually go to the game, but you’ve already sunk $400 and it’s too late to sell the tickets. Naturally, you can’t let those tickets go to waste, so you suck it up and go to the game.

But this is completely irrational. It’s called the sunk cost fallacy.

To understand your mistake, think of your options in terms of costs and benefits. We’ll call the $400 you spent a cost of -4. Actually going to the game would be a benefit of +0, since it doesn’t appeal to you. And going to the party is a benefit of +2.

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