Reflections on the intersection of economics, history, politics, psychology and science

We all spend a lot of time thinking about the past, often when we’re trying to make a decision in the present. Sometimes that reflection ends up complicating our decision-making. Why is that? And if we want to avoid repeating past mistakes while also not preventing ourselves from taking new paths, what’s the proper way to use our knowledge of the past?

This podcast is about the relationship between the past and future, and the psychological phenomena that cause people to create connections between them when they don’t exist and to ignore or downplay connections when they do exist. The discussion starts with the discussion of a sunk cost and the sunk cost fallacy, which can be described colloquially as “throwing good money after bad.” Examples are explored in the areas of personal and social interactions, business decisions, and gambling.

The psychology of sunk costs centered around a phenomenon discussed in a number of previous podcasts, the avoidance of cognitive dissonance. This is seen when people jump through amazing mental hoops to avoid dissonance by effectively connecting what they may have done in the past to what they will do in the future in a seemingly logical way. Related issues include practical considerations about “looking bad” to others (in business or in politics) and phenomena such as plan continuation bias and optimistic bias

Although the term sunk cost is most often associated with business, it is also a good framework for understanding history and politics. Particularly because of the avoidance of cognitive dissonance, sunk costs in politics are about how we use the past, correctly or incorrectly, to inform and build the future. This manifests itself in how both politicians and the public get entrenched in issues (large and small), including everything from climate change denial, the bias to continue losing wars, and long-standing policies like the U.S. embargo on Cuba!

The discussion also links to the prior podcast on expertise in analyzing how experience and wisdom mitigate the tendency for people to be subject to all the biases that cause us to erroneously analyze the past, including our own previous actions!  

For those curious about the horse-racing con Mark refers to in the podcast — which takes advantage of the typical human way of using historical knowledge — check out this description. But don’t actually try it, because you might get arrested!

Key Terms Used

Cannibalization (in business), Cognitive Dissonance, Conservatism, Depreciation, EBITDA, Gambler’s Fallacy, Generally Accepted Accounting Principles, Optimistic Bias, Plan Continuation Bias, Rational Decisions, Risk, Sunk Cost, Sunk Cost Fallacy