[VIEWPOINT]Roh clings to sunk costs as he sinks

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[VIEWPOINT]Roh clings to sunk costs as he sinks

People feel the pain from their losses more strongly than pleasure from their gains. There is also a tendency by people to avoid the certain and visible loss ahead of them and choose uncertain profits in the future.
Let’s take an example. If you got a free ticket for singer Cho Yong-pil’s performance, but strong snowstorms blew in, would you go to the performance? If you are not a great fan of Mr. Cho, you might hesitate. But if you bought the ticket at a high price and with difficulty, you probably would go in spite of the bad weather.
According to a study by scientists in the field of modern behavioral psychology, most people go to sports games or performances in bad weather, even snowstorms, if they bought the tickets themselves. However, they don’t tend to go if they got the tickets for free.
The price for the ticket has already been paid, so a person can not get their money back, regardless of whether he or she attends.
The liability of an accident in a snowstorm on the way to the theater is the same, whether the ticket is for free or paid.
But people have an especially strong attachment to tickets they bought themselves. Why?
It is because people think that the loss from wasting the tickets they bought is bigger than the gain from watching a free performance.
They think that wasting a free ticket is not a big loss, but wasting a high-priced ticket would be.
Richard Thaler, an American behavioral scientist and economist, defined the psychological illusion as the “sunk cost fallacy.” It refers to irrational attachment to a cost that’s already been paid.
The sunk cost fallacy is often committed in large scale financial projects, too.
If a serious question is raised about the feasibility of a large-scale national project in which the government invested some trillions of won (billions of U.S. dollars) and it is more than 90 percent complete, will it be possible to stop the project and re-examine the whole plan from the beginning? In most cases, the decision will be tilted to the side that the project should be completed, otherwise the cost invested will be wasted.
The situation is the same in the case of investments by private businesses.
Even if an investment proves to be a failure, businesses often fail to cancel it, due to “loss aversion.” Investing in an insolvent business, like throwing water on thirsty soil, will not make the business survive.
But it is difficult to overcome psychological attachments to sunk costs, because there is a problem of responsibility in addition to the psychological effects.
When a project that costs a large amount of money is stopped, someone must take responsibility.
The fallacy of the sunk cost derives from the psychological desire to evade pressure from that responsibility.
Such self-rationalization, that the project should be completed since it has already gone a long way, or that it will certainly be proved to be a success although not here and now, are heard often.
But sunk costs can never be retrieved and the loss will only grow bigger if the project is promoted further.
Recently, President Roh Moo-hyun and some of his cabinet ministers have raised their voices, despite the public opinion revealed by the May 31 local elections.
They said, “We will promote existing policies without fail,” or “We will not budge an inch from our present position.”
It seems that the present government as a whole is fallen to the fallacy of sunk cost.
In the bottom of the psychology, the government obstinately pushes forward policies that have been proven failures, saying: “If we stop here, the efforts we have made so far will be wasted,” or “We don’t want to take the responsibility over the failure made so far.”
But it is better to give up the sunk costs as soon as possible.
Whether it is for personal pride or for evasion of responsibility, there is nothing to gain except that the damage will grow bigger, the further you promote a wrong policy.

* The writer is an editorial writer of the JoongAng Ilbo.


by Kim Jong-soo
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