How do you abandon a lost cause?

There is a basic concept in economics known as “sunk costs”. The term describes the reluctance of an investor to get out of an enterprise in which a large investment has been made, but which is losing money and has little prospect of recovery. An example of this would be someone who invested a few years ago in Enron, saw his investment climb, then drop like a rock as the company’s true financial picture came to light. At some point, you realize that it’s not coming back, but, since you have so much invested, it is difficult to sell and try to salvage something. Psychologicially, it is also an admission of failure and that adds to the reluctance to give it up. You are tempted to believe you made the right choice and it’s going to come back, given enough time.

The “sunk costs” concept can be applied to other investments we make that are not strictly financial. For example, the Iraq War, once it was determined that the whole idea on which it was based was a fraud, a simple and maybe a logical conclusion would be to withdraw as fast as possible to reduce further expenditures on an invalid enterprise. Such decisions aren’t really that simple.

The ability to recognize failure, admit it, then change course is difficult because pride is involved. Let me propose that we need to change course in the “war on drugs”. In this case, the purpose is noble: to reduce the use of illegal drugs. We chose a “logical” solution by locking up folks who use or sell illegal drugs. Our prisons are full of them. 60% of folks in the Federal system are there on drug-related charges. Many others are there because of a criminal enterprise they were involved in to pay for their drug habit. Examples: breaking and entering, possession of stolen goods, and passing bad checks.

Our investment has been in enforcing drug laws, investigating drug related crime, and prosecuting and locking up drug related offenders. Just how wise is this? We have a sunk cost (billions upon billions) that we’ve invested in this problem. The net result is drug use is about the same as it’s always been and our incarceration bills are out of sight.

We need to change course, but what is holding us up? Is it pride that we picked a path and it has been a total failure? Is it that we are more interested in punishing than in fixing the problem? Is it the fear that someone who is even more ignorant than you are will claim that you are being “soft on crime”?

Or, will we keep holding on to that Enron stock until it costs more to sell it than it’s worth?