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logosmith — Wed, 08 May 2013 08:59:50 -0000

It might be interesting, conversely, to better articulate how people and businesses sometimes misuse the "sunk cost" principle to rationalize a foolish decision to dump an asset or program when the real reason is they want to get an embarrassing failure out of their sight.

A proper understanding of sunk cost simply means we *do* understand that the resources have been spent/consumed regardless of what we do moving forward or how we feel about that (or our predecessors). Regardless of our memory or judgment about the decisions made or why they were made, the objective fact is: "We *did* spend all this; what's the best use we can make of it?" That's just mitigating consequences, or in plainer English, "cutting our losses." I think it's just plain rational to recognize it if we already have a lot of chips on the table, but that doesn't alter the fact that we should do our best to figure out the CURRENT odds and change our bets accordingly as soon as we can.

I'm not sure I get the example of R&D cost on a drug. Manufacturing costs of a drug are usually quite low compared to the R&D; that doesn't call for a rethink of the pricing. However, to perhaps give an example of what you're talking about in the article - if it turns out the company can't sell the drug for as much as they thought, they should probably still sell the drug (as long as it's safe and effective, of course) provided they can make a profit relative to the manufacturing, distribution, marketing, and other ongoing costs. They may never make a true profit against the R&D, but it's not "cutting their losses" to discontinue work on the drug; it's increasing their losses.

That said, it's not irrational to try to charge enough for the drug to make a profit against the R&D. If all goes well, R&D cost is better understood in economic terms as a fixed cost, not a sunk cost.

Re: Woman Struck by Lightening while filming

logosmith — Fri, 11 Jul 2008 13:16:21 -0000

Is there something wrong with me that my first thought was: "Hey, the camera still works?!?"

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Re: Woman Struck by Lightening while filming