How the concept of sunk costs changed my life – Laura Hopkins ’14

Bike trip

In October 2015 I went on a cycle-touring holiday with my bici-friki boyfriend. It was loads of fun. And loads of hard work. Every day was a new challenge:

  • the fancy bike computer that was showing us the route was set on training mode on the first day – it took us 112km to do a 50km stretch on the back roads up the mountains;
  • I suffered not one, not two, but three unfortunate punctures on the road;
  • and then there was that storm we tried to ride through.

(I still highly recommend bike touring, and count the holiday as a highlight of the year. And I had an otherwise great year, too.)

We were trying to reach Trieste in Italy to visit our friend Rafael. We had two weeks before we were due to show up for a flight home from nearby Venice. (We were optimistic.) One week in – when it was clear we wouldn’t be able to cycle there in time unless our panniers turned into combustion engines overnight – we decided to bite the bullet and book a few trains that would get us there in time to hang out with Rafael for a few days and fly home.

Remember that storm I told you about? Well, it scuppered all our plans. There we were ready to take our trains in the direction of Italy, and the line was completely down due to storm damage.

There were six days left of our holiday before we needed to be back at work. We waited a day, figuring we could check out the town we found ourselves in (Avignon – beautiful) – it would take 1.5 days to get from Avignon to Trieste by train, so after waiting one day in Avignon and then travelling, we’d still have 3.5 days before needing to get our flight. That was cool with us.

sights

However, the trains weren’t running the next day either. Should we wait another day? Now we’re only looking at 2.5 days in Trieste. Of course we waited. Rafael is an awesome guy and a great friend.

But the following day brought us no luck. If we waited another day, we’d only have 1.5 day between arriving in Trieste and flying back from Venice. Yes, it’s close, but it’s still half a day of travelling to the airport etc.

We were faced with the decision to either:

  1. wait for another day and only perhaps be able to get on the train, and then spend half of our remaining three days of holiday travelling, only to spend one night with Rafael and then turn around and fly home.

OR

  1. Cycle back the way we had come, away from the bad weather, and enjoy four further days on the road.

How much had we paid on the tickets?

  • Two TGV tickets from Avignon to Nice +
  • Two fast rail tickets from Nice to Milan +
  • Two train tickers from Milan to Trieste +
  • Two flights from Venice to Barcelona, including luggage and bike fees =

Somewhere back there I estimated this to be in the region of €600 total.

We decided to turn our bikes around and cycle back to Barcelona. We could make it to the border in four days and then hop on a train.

That was one expensive decision, right?

No. The concept of sunk costs tells us why not.

This somewhat counter-intuitive lesson reminds us that we can’t change the past – perhaps not such a revolutionary concept when you put it that way. Sunk costs tells us to make decisions about the future, taking into account only prospective costs, and not those already incurred (unless you have a time machine, in which case don’t tell me because I will be mad you didn’t lend it to me when I clearly needed it to tell myself not to buy those tickets.)

We would have paid the money had we been sat on the trains or not. In this moment, we were facing the decision as per points 1 and 2 above, but with no reference at all to the expenditure on the tickets. That was history. Yesterday’s news. Somebody else’s money.

There were no regrets.

I knew we hadn’t lost €600.

Econ told me so.


Laura Hopkins graduated from the Barcelona GSE Master in Economics of Public Policy in 2014. She divides her time between creating, monitoring, and evaluation frameworks for international development programs, and developing her business, Healthy Start Holidays.

Networks and Contagion in Financial Markets

Too well connected to fail

(This article follows on from a more general post on the study of networks in economics)

In this model, as well as those concepts Jackson discussed in the broader discussion on networks, we have the concepts of diversification and integration to separate the breadth and depth of connectivity of one organisation to others. A company/organisation/ country with many connections to others would be highly diversified; where those interests represented a higher proportion of their overall connectivity, they would be highly integrated. Continue reading “Networks and Contagion in Financial Markets”

It’s a Small World, After All

Where's wally?
Where’s wally?

We all know we’re only 7 steps away from Jonny Depp. Or Obama. Or Lionel Messi (maybe, quite literally if you’re here at the GSE.) However, the world is not only small; it is shrinking. We are becoming more interconnected through new forms of communication. We find out information through these networks, which then influences our decisions. What we do, therefore, is influenced by whom we know.

Matt Jackson at Stanford University has been analysing the increasing connectedness of the world and its implications on spreading information, and came to Barcelona to explain his findings at the UPF opening ceremony. (And there we were thinking we’d been here so long, you could look us up on the book directory at the library and know where to find us.)

So what is a network and how can we think about connectivity within one? Continue reading “It’s a Small World, After All”

The promises and pitfalls of genoeconomics

What can our genes tell us about our economic behaviour?
What can our genes tell us about our economic behaviour?

In keeping up with cutting-edge economics research, GSE chose a controversial topic for its opening seminar in the microeconomic series for this academic year:  Genoeconomics.

Daniel Benjamin came to the UPF campus on September 30th to give an introduction into this brand new field of research. The areas is currently opening up in light of the cheap DNA data now available to researchers. Given, as Benjamin rightly stated, it is natural for economists to seize on this new opportunity for analytical enquiry, he has been testing the question: does our genetic code influence our economic behaviour?

Benjamin gave us a brief overview of the kinds of effects his work his modeling, which I will summarise even more briefly: over 99% of genetic data is the same from one person to another, however along the genome there are certain locations where variation is more likely.  One such variation is a Single Nucleotide Polymorphisms (SNPs – pronounced ‘snips’ – for short); there are around 10 million such variations in the human genome. Although there is also genetic variation of other types, this is the most common. Benjamin and his many collaborators are studying SNPs. Continue reading “The promises and pitfalls of genoeconomics”