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Sunk Costs and Sports Personnel Decisions

2013 January 18
by Phil Miller

James Surowiecki writing about Mark Sanchez at the New Yorker:

After a farcical 2012 season, in which the New York Jets invented ever new ways to lose games (thus the “butt fumble”), the team’s general manager, offensive coördinator, and quarterback coach are all gone. Yet Mark Sanchez, the starting quarterback, remains. He has played poorly for two seasons in a row, and has now thrown more interceptions in his career than touchdowns. But the Jets have invested an enormous amount of energy and money in Sanchez, and, assuming that no one will trade for him, they are contracted to pay him $8.25 million next year, whether he plays or not. So figuring out what to do with Sanchez will be trickier than you might think.

The Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way).

Here and here are two definitions of sunk costs, both of which IMHO don’t go far enough because they only consider past costs sunk.  Generally speaking, I think Surowiecki has it more accurately.  A cost is sunk if it cannot be avoided.  Whether the cost has already been paid is irrelevant.  What matters is can it be avoided if a different choice is made.  With guaranteed money committed to a player, whether that player sees the field in meaningful duty, that money is essentially gone/kaput/sunk.

Why then would franchises play players based on supposedly sunk costs?  For one, there is the desire not to waste.

Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad.

Surowiecki notes that the more someone has invested in a project, the greater the belief that it will work out for the best.  If you wonder why your struggling team stays with it’s high draft pick when there is a competent back up already on the team, this may be why.

Then there is the concern for reputation.

“Giving up on a project, though, means that somebody has to admit that he shouldn’t have done it in the first place,” Arkes says. “And there are lots of executives who would rather be tortured than admit that they’re wrong.”

This reason is interesting because it suggests that by going through with a decision, the person is avoiding an expected reputational hit.  Even if the costs are sunk, the hit to the reputation is not.  Depending on the circumstances, sticking to one’s guns may be fully rational.

4 Responses
  1. January 18, 2013

    Everyone in sports management is out looking for the next superstar and they’ll go to all extremes to lock him up long term. I think my policy would be nothing longer than a two season contract. There are many athletes who would refuse to play for a team under those circumstances, but in most cases they are a “bust” (Just to name three: DiPietro, Islanders; Sanchez, Jets; Rodriguez, Yankees). Make a player prove his worth in two years or don’t re-sign him. If a player proves himself offer another two year pact with an increase in salary. This would stop clubs from throwing good money after bad product.

  2. OGT permalink
    January 19, 2013

    Hal- I don’t think that negotiating strategy in and of itself would be enough to produce winning results, if you are evaluating talent in the same way as your rivals you will merely end up underbidding them for the same talent, or paying more per year for a succession of mixed results.

  3. Wan Ihite permalink
    January 19, 2013

    This isn’t a completely sunk cost, though, because right now they have a bad quarterback for “free” (i.e., for no additional expense), whereas if they brought in another one they would have to pay new money extra (so they’re paying the sunk cost AND the new guy’s salary). The NFL has a pretty hard salary cap is my understanding, so that extra new cost is a potentially significant sacrifice… which is only going to be worth it if the improvement in performance is considerable.

    Think of it this way: If it costs you 5 M for the new guy, then it’s not a 5M QB, it’s moving from an 8.25M bad QB to 13.25M for a potentially upgraded QB. That’s a lot of money to lock up in one position in a hard salary cap world. OTOH, a team with a bad QB is pretty much hosed, so… yeah.

  4. January 19, 2013

    The length of contracts sought by MLB players in their pursuit of “security” has been absurd for a long time. Teams habitually grant pacts of seven years to players who are not really solid bets to be effective over that long a period; better teams would increase the per-year figure somewhat and shorten their gamble timewise. Even playing fantasy baseball, the hardest thing to do is to terminate a player who has cost dearly and produced little — the fear being that he might finally become the performer you had hoped for in the first place.

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