Sunday, October 29, 2017

Houston Texans succeed by ignoring sunk costs

Although every econ student, and most MBA's, learn to ignore sunk costs, this learning seems not to have reached the NFL:
The propensity to stick with a quarterback too long isn’t just an anecdotal phenomenon favored by frustrated fans sick of losing with the same players. It has backing in research and hinges on the basic economic concept of sunk costs—the idea that money spent can’t be recovered. Typically, the more teams invest in a player, the more they’ll let him play.

Except for the Houston Texans, who have replaced their starter with Deshaun Watson, and now have one of the league's best offenses:
How the Texans reached this position—with an eagerness to look for a better option at quarterback at any given moment—sounds obvious. But it’s borderline radical in a league where coaches and executives attach themselves to their most prized investments with feverish devotion.

Some of the reluctance to ignore sunk costs is that management has to admit that they made an earlier mistake.


  1. As the example in the book that pertains to football states to ignore the sunk costs as it isn't relative to the decision. If your football team is losing you don't have to take the cost of the ticket into account in deciding whether to stay or go. The price doesn't vary. (Froeb et al) Often costs are incurred no matter what you do so shouldn't affect decision making. Per Investopedia: Since decision-making only affects the future course of business, sunk costs should be irrelevant in the decision-making process. Instead, a decision maker should base her strategy on how to proceed with business or investment activities on future costs.

    Is the case of a quarter back really a sunk cost as a sunk cost is not recoverable. If there is another option in not losing money everyone would choose to not. The team had another option to put another team mate in the game to save the season. They were able to recover in some way.

  2. NFL teams would be wise to learn from the concept of sunk costs. It seems more and more teams are continuing to play players that are struggling simply because they have “sunk” significant money into their contract. The money has already been invested, so continuing to play a player who may be hurting your team is detrimental to the overall success of the organization. There are often times when a better player will not get the opportunity to play due to the sunk cost of high paid players and the pride of NFL managers and ownership. When making decisions, you should consider all costs and benefits that vary with the consequences of a decision but only costs and benefits that vary with the consequences of the decision. These are the relevant costs and benefits of a decisions (Froeb, McCann, Shor, Ward 2016). The Deshaun Watson example mentioned in the article is an example of a better player riding the bench for the first couple games due to the time and money invested in Tom Savage. Although I do feel this isn’t the greatest example of a sunk cost because Tom Savage was not a highly paid quarterback compared to the rest of the league and one of the reasons Deshaun Watson didn’t start the first four games was due to his status as a rookie. Most teams do not start rookie quarterbacks opening day of the NFL season due to a variety of reasons including lengthy complicated playbooks, speed /complication of NFL defenses, adjustment period in reading defenses from colleges to pros etc. There may also be hidden costs with a decision to start a rookie over a veteran established quarterback. Benching a veteran quarterback can cause a media frenzy, turn a locker room against the coach or upper leadership, and if that rookie quarterback is successful he will command a much larger salary when his contract comes up down the road.

    Managerial Economics: A Problem Solving Approach, Froeb, McCann, Shor, and Ward, 4th Edition 2016, South-Western Cengage Learning