Don't fall for the fallacy
Written by Juan Palenzuela, Associate
Edited by Laura Hamilton, Managing Partner
Intertemporal choice – the fancy way that economists use to describe making choices about the future – is difficult, but inevitable. While it is impossible to predict what will happen, we can inform ourselves and make educated decisions. Unfortunately, that is often not enough.
One thing is to make a bad decision about the future, we make those all the time. Worse still, is to allow that past decision hinder your decision making at present.
It is extremely common. Do you remember that time you force-fed yourself because you already paid for the food? Or that friend who stays in a project, job or relationship that makes them miserable, yet they refuse to leave given how much they’ve sacrificed so far?
This phenomenon, which is known as the sunk cost fallacy, affects individuals, organisations and States alike. It should be avoided at all costs.
For cold-blooded economists, decision making is much simpler. If costs outweigh benefits at present, go for it, regardless of the result of that equation in the past. The reverse is true.
In the current context, if new evidence emerges putting the effectiveness of our current lockdown policies into question, or, on the other hand, if the cost is estimated to be much higher than expected; political and business leaders need to be ready to make swift decisions based on the available evidence, even if that contradicts previous actions.
As events in Sweden evolve, for example, the country’s approach to handling the crisis could be an example for Europe to follow (or vice versa), ahead of a potential second wave of infections.
Making a U-turn under those conditions would be politically costly, but it is far from reproachable, it would be an example of good judgement and competent leadership.
Boris Johnson announced that his government hasstarted the process of easing – not ending – lockdown measures in England. From today, those who cannot work from home will be allowed to go to work, while everyone else is advised to continue at home. The most significant change, however, is in the message, with “stay at home, protect the NHS, save lives” now replaced – in England – with “stay alert, control the virus, save lives”. Other UK administrations will not be adopting these new measures at this time.
In Scotland, the first minister called for simpler messaging and stressed the importance of maintaining the previous “stay at home, protect the NHS, save lives”. Nonetheless, some easing of restrictions were also announced as Scottish residents will now be allowed to exercise more than once a day.
An Iranian navy ship was sunk yesterday near the Strait of Hormuz due to friendly fire, killing dozens of sailors. Tensions were dangerously escalating in the area around the strait but thawed due to the coronavirus outbreak in Iran. Official sources described the incident as a crash.
Business and economy
One of Latin America’s largest airlines, Avianca, which also turns out to be the second oldest operating airline, filed for bankruptcy yesterday after failing to meet a bond payment deadline and failing to secure a rescue deal with the Colombian government. The company went through a major restructuring last year, and it was on the road to recovery, but it's tough for an airline to stay in business when its planes can’t fly.
Argentina is reportedly on the brink of default as talks with creditors have failed so far. A new deadline to restructure $65bn of foreign debt, which was originally set and missed for Friday, was extended to today. If no agreement is reached, the country could default by 22 May, when a grace period ends for a $503m debt payment that the government skipped last month.
Elon Musk vowed to restart production at Tesla’s factory in California in defiance of local government orders to keep the plant closed. The company released a “return to work” guide for employees over the weekend, just after suing Alameda County, where it is based, in a bid to get legal clearance to reopen.
Columns of note
Writing for the Times, Martin Thomsen says that the pandemic has broken confidence in global supply chains, and it will have a lasting impact on the logistics industry.
In the Financial Times, Martin Sandbu argues that after large injections of cash into the economy, it is now time to focus on the composition of budgets and restructure our tax system.
Source: The New Yorker
The week ahead
Starting today, several countries including England, Spain and France are easing lockdown measures as transmissions continue to drop.
Argentinians will be on the lookout to see if the country manages to reach a last-minute agreement with creditors today.
China will also release its consumer price index (CPI) today, and industrial production and unemployment data on Thursday, which will provide a glimpse as to how reopening is working in Asia.
Retail sales for April in the UK and US will be released on Tuesday and Friday respectively. They matter given that the two countries are much more dependent on consumer spending than China, but details of the extent of the damage are not yet clear. We will also be able to see how much eCommerce has displaced traditional brick and mortar businesses.
What's happening today?
Final dividend payment date
Int. Economic Announcements
(07:00) Consumer Price Index (GER)
Source: The New Yorker
Did you know?
America's mother’s day (which was yesterday) was originally a day for women to protest the killing of their sons and husbands in the US Civil War
House of Commons
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Foreign and Commonwealth Office
Covid-19 strategy - Boris Johnson
To approve the Fourth Report from the Committee on Standards - Mr Jacob Rees-Mogg
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