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God and economics

Exposing the gospel flaw in the sunk cost fallacy

I've spent my study leave this week attending Acton University in Grand Rapids. Why? Because nothing beats 4 days of lectures on political and economic theory, applied theology, and well reasoned dialogue on how various concepts from these disciplines enable us to experience and extend the life-changing love of Christ in our homes, the workplace, and our communities.

One of the economic concepts that came up is how the “sunk-cost fallacy” often keeps money and resources flowing to areas of the economy where it is no longer beneficial. What is the sunk cost fallacy you say?

We like to think that we make rational decisions based on the future value of objects, investments and experiences, and that we are able to stop doing something when everything screams, “Stop!” Like fixing up your 1994 Ford Taurus. 

The problem is, that's not true. Our decisions about spending and investment are heavily influenced by what we've already invested and emotional attachment. Meaning, because you really love that old car, you've already invested thousands, and you don’t want that money to go to waste, you'll go ahead and replace the transmission, and the brakes, and the tie rods, and the head gasket, and the struts. Again.

Of course, the smart decision is to cut your loses and move on. A well-reasoned investor recognizes and overcomes the sunk-cost fallacy. And while that has real benefits for economies, and marketplace innovation, thankfully, it's not how God deals with us.