Imagine you are running a business. You make a poor decision in investment on a piece of capital that does not yield any positive returns. Economists consider this a ‘sunk cost’ and suggest your next decision should not be a function of these past expenses. They are in the past, and you should only think in terms of marginal cost and marginal benefit.
In the sports world there are two recent examples of such logic. The LA Dodgers signed Andrew Jones to a multi year contract. Year 1 passes and he proves an enormous disappointment. What should happen next… if the Dodgers are rational they will cut Jones and eat his salary (which they did). Here is a similar example of this principle in play in the case of Matt Bush, who some say is one of the biggest baseball busts of all time.
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I agree that in business you should eat your losses and plan for the future. I can also give one such example of this relating to sports specifically in Nba. It's with a player named Stephon Marbury, who ultimately ended up being a bust for the New York Knicks. He was highly touted as being one of the best point guards in the league and was suppose to revive the Knick's franchise. Yet he ended up actually being a cancer to that team and made them one of the laughing stocks in the nba with his selfish game and 'me' attitude.
ReplyDeleteThe knicks didn't cut him though, and I thought that was a big mistake. He doesn't get a long with teammates or his coaches and doesn't help in any way with the teams success for the future. I thought they should've just paid him his 20million and move on. I think now they are paying the consequences in more ways than one in keeping him around. This is the result of what happens when you dwell on your bad decisions and let it get in the way on what you really want to accomplish. That is why they should leave it in the past and think in terms of marginal cost and marginal benefit, as you said.
If we were the Knicks, and we were to consider cutting Marbury, our Marginal Benefit would be the wage we would recoup. The Marginal Cost is that he signs with another team (likely… rumor had it he would sign with Boston) and plays against us. If we were in the NY market, maybe the financial end would not feel as large (the MB), thus the MC > MB, so we don’t take the action (don’t cut him). Maybe.
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