How the sunk cost fallacy, particularly applied to political capital, can cause public officials to insist on the timely completion of dubious projects.
A few months ago, I went “meta” and did an article on the Gordian knot of compromises the political process forces on public projects (and on private ones, too; though we seldom get to see the dirty laundry that results from corporate cock-ups). This article, likewise, switches gears from the nitty-gritty of transport projects and politics to the higher-level topic of what forces drive public policy decisions. Today’s article is dedicated to the Sellwood Bridge replacement project and the reaction to the news that Clackamas County voters are unwilling to help fund the project.
Rather soon after the vote was announced, Multnomah County commissioner Deborah Kafoury had this to say:
Now that Clackamas County voters have spoken, we will roll up our sleeves to try to complete this important project without their help. Safety concerns dictate that we must fix the badly deteriorated bridge, the busiest two-lane bridge in Oregon. Replacing the bridge must remain our top transportation priority.
This prompted a few howls of outrage those opposed to the project or its funding scheme (including a regular PT contributor who is a well-known local transit critic), noting that the campaign in favor of Measure 3-372 suggested dire consequences, including possible closure of the current bridge (which is in poor structural condition, and already closed to large vehicles, including trucks and busses) if funding is not secured.
I’m not going to debate here whether the “yes” campaign crossed any ethical lines. Bluffing and FUD (fear, uncertainty, and doubt) are part and parcel of political campaigns, and the “no” side engaged in some rather speculative claims of their own–suggesting that approving a $5 vehicle license fee to help pay for this project would pave the way for many more such levies in the future (“its not just $5” was a popular campaign slogan used by opponents). But it was fairly obvious that Multnomah County was bluffing, somewhat–and that they are not about to permit the existing bridge to close without a replacement being built.
This article takes a look at why.
There’s a well-known economic fallacy known as the sunk cost fallacy. In the sunk cost fallacy, already-expended (or committed) capital is cited as justification for continuing some course of action, even when that action may be no longer viable. Commonly expressed, it goes like “we’ve already spent $x on this, so we might as well finish it”. Rational analysis shows that the money spent is already long gone, so ought not factor into any decisions going forward–only future costs and benefits should be considered by decision-makers.
Why does the sunk cost fallacy frequently trip up decision-makers? It’s not because they can’t read a spreadsheet. In many cases, it’s because changing direction is tantamount to an admission of error. And in some cases, a decision-maker may have even higher personal stakes riding on a project than just ego or pride–in my professional career, I’ve been on several projects deemed vital to the health of the enterprise–with the clear implication that heads will roll if the project does not run to completion. Many of these projects ended badly, with heads rolling anyway.
Another way to approach the issue is to note that decision-makers are managing multiple different “resources”, only one of which is the money of the organization. Another is their personal political capital–in many cases, a manager (or an entire organization) will need to expend significant amounts of this in order to bring a project to fruition, with the payout only coming if the project completes. And political capital is typically spent all up front–if a change of direction occurs, the political capital is gone.
Yet despite this, a scene that plays out all too frequently in the boardrooms of the world is the executive asking the subordinate if he/she is willing to “bet their job” on a particular course of action. While such queries may be helpful in sniffing out BS (and in providing continual motivation once a course of action is approved), it effectively commits the subordinate to the project–and may cause her to defend the project even when common sense makes it obvious that the whole thing ought to be scrapped.
The public angle
Many aspects of the public sector make the sunk cost fallacy particularly troublesome. For one thing, most public works projects are financially back-loaded: most of the money isn’t spent until concrete starts to pour. Given that, prior to the start of construction, there ought to be ample opportunity to explore options and ensure that the project is really the right thing to do. The Columbia River Crossing is often criticized for the over $100 million spent on planning to date, but that figure is still a drop in the bucket compared to the over $3-$4 billion the project is expected to cost (a figure which many critics think is ridiculously low).
Yet the project sponsors are proceeding as if there is a gun to their heads, effectively declaring the current plans closed to any significant modifications. Project leaders, and their sponsors in Salem and Olympia, speak of deadlines and dates as though their life depended upon it–even though the project hasn’t secured all its funding yet, and is facing harsh criticism from many quarters.
One likely explanation is that many involved in the project–Governor Gregoire, to a lesser extent Governor Kitzhaber, and numerous officials in both DOTs, have bet a lot of political capital on the project, and thus have quite a bit at stake in seeing it run to completion. Many sponsors of the project all have their wants and desires, and have been promised these (ample highway lanes, green elements like light rail and ped/bike facilities)–and are expecting that they be delivered. A significant change in the project’s direction would cause many of these fine upstanding public officials to lose face–and in the case of the elected ones, would provide plenty of ammunition for political opponents. (Both Kitzhaber and Gregoire won election in close races).
In the case of public projects, time is also an important factor for many reasons. If Federal funding is involved, the NEPA process is a major headache; significant changes can add significantly delay. Securing funding requires lots of delicate negotiations, and grants often come with expiration dates–delays in the planning phase can jeopardize the receipt of funds needed for completion. There’s also the factor that politicians like groundbreaking and ribbon-cutting ceremonies, and often would prefer that these happen during their terms in office.
Finally, public-sector projects frequently attract political opposition of a nature not found in well-run private companies. (In a well-run company, disputes over the necessity and/or parameters of a project are swiftly ironed out, and bad-faith participants are removed. That said, there are many poorly-run enterprises where it is not unusual to find employees or entire departments trying to undermine the projects and initiatives undertaken by some other part of the company). But what is often considered a bug in the world of business, is a feature in democratic politics. And political actors often try to throw wrenches in the gears of projects they oppose (or which are associated with political adversaries), and this is considered all part of the game.
One way to do that is to propose major changes in a project mid-course–which is one reason that savvy decision-makers will regard any such proposals offered later in the project with suspicion. Picking on the CRC again–proposed design changes promoted by Portland mayor Sam Adams were pretty-much rejected out of hand by the project committee and by the governors–who all but accused the mayor of offering proposals in bad faith in an attempt to gum up the works on a project whose current direction the City of Portland is adamantly opposed to. And it wouldn’t surprise me to learn that this–along with the whole “iconic bridge” shtick, is exactly what Sam was up to.
Back to the Sellwood
Given that, it’s rather obvious that “we may have to close the bridge if this doesn’t pass” was a bluff. The Multnomah County commission has invested quite a bit of political capital (and planning dollars) into the current project, and thus isn’t going to fold up shop just because Clackamas County voters aren’t willing to contribute to the project. (Likewise, Milwaukie MAX is proceeding on schedule despite all the controversy around its funding, and despite the likely prospect of Clackamas County voters overruling the generosity of their commissioners on this project as well. At this point, no county ordinance has been passed to allocate the funds, so there’s nothing for opponents to refer to voters–but it’ll happen).
In some ways, this is unfortunate. The withdrawal of Clackamas County’s funding share provides an opportunity to reconsider the Sellwood Bridge project (there is much about it that I don’t care for). Asking one county’s voters to help pay for another county’s infrastructure is indeed unusual, especially when the design of the project isn’t particularly geared towards the users from the other county, so I’m not entirely unsympathetic to Clackamas County voters. More on this will come on my next article.
But it appears that instead of taking advantage of this opportunity, Multnomah County intends to press on. To be fair, given the decrepit state of the current bridge, time may be really of the essence–and that significant delays in the project might result in the existing bridge being closed without a replacement in the pipe.
But from here, it looks like there’s a lot more riding on the current bridge project than bikes, busses, and cars.16 Comments