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Sunk Costs! And Why We Need To Cut Our Losses Sometimes.

Ok, let’s take a little stroll into Victoria, but before I do, I want to talk about a racehorse.

Breeding a racehorse is an expensive business. So is racing one. Once, many years ago, I had the wonderful experience of being involved in a syndicate of people who bred a racehorse. We had it broken in by a country trainer who had a showjumping background so – compared to some in the racing industry – he was very good with horses. The trainer told us that she was a lovely filly. Nice natured. She was “a doll”. He advised us to sell her to someone interesting in equestrian sports because she was far too slow to ever win a race. “I could keep taking your money,” he said, “and get her to the track, but you’re better off cutting your losses!”

I passed the message on to the syndicate. Many pulled out, but a few decided that it was better to give her another chance with a different trainer. After all, they argued, racing was full of stories where champions were dismissed too early.

And so, eventually, this filly had her first start. She managed to keep pace with the field until they sprinted about four hundred metres from home. I have never seen a horse get so far behind so quickly.

Yes, I was glad that I understood the notion of “sunk costs” and that I wasn’t one of the people who’d spent the hundreds of dollars getting her to that race start.

But of course, it’s also true that it had cost me far more money than I should have spent to get me to the point of pulling out. When I pulled out, I had nothing to show for it. And, as someone said to me at the time, “You’ve spent all that money and now you’re pulling out without even getting her to the races to find out if she’s any good.”

Yes, we don’t like the idea of thinking we’ve just wasted our money. It’s why people hang on to shares that they bought because some guy in the pub told them that someone had told them something, and that sometime in the not too distant future, they’d be worth a fortune. It’s also why people keep playing the same poker machine: “It must be due to payout now; it has so much of my money in there, there has to be a jackpot soon!”

Which brings me to the recent decision by the Victorian Labor Government not to proceed with the East-West Link.

For some strange reason, people seem to think that it was worth spending three billion dollars to link a freeway in the east with Flemington Racecourse. (Ok, it wasn’t directly with Flemington Racecourse, but I’m trying to keep the racing theme going here, and it was walking distance.)

The business case wasn’t released. But hey, let’s not worry about that. They told us that it was fine and releasing it would just enable people to adjust their bids and undercut the prefered bidder. At least, that seemed to be the rationale. But I’m not good at managing money. I once invested in a broodmare and – in the end – I had nothing to show for it. I’m not like those Liberals. If there’s one thing the Liberals are good at doing it’s managing money, and they often manage to move it from one place to another quite successfully, while arguing that it’s better off in the hands of someone they trust than in the hands of the public service who’ll just waste it on things like benefits to the undeserving poor. So when they say, Trust Us, you know that you want to.

And they told us that they were the only ones who could ease the congestion on Punt Road. Which runs North-South. And it seems to me that this was like arguing that I’m going to ease the congestion at Sydney Airport by building another airport in Canberra. But what would I know?

Then Labor were elected, and it emerged that the Liberal Government, in the final week before entering caretaker mode, not only signed the contract, but gave the consortium a written guarantee that they’d be paid well over a billion dollars, even if the road wasn’t built. Labor managed to negotiate a deal for considerably less than the billion dollars.

So now we have letters to the editor complaining that Labor have spent all this money, and they’re not even going to build the road. What a waste! Not many, of course, complain that the Liberals rushed to sign such a one-sided contract. The Liberals are good with money. They’d have built us a road that would have cut several minutes off a journey that sometimes in peak hour might take as long as twenty minutes.

Notwithstanding the fact that we’d be much further in debt if we’d actually built the road, I can’t help but wonder, would any of these people be interested in a plan to use the DNA of my failed racehorse to see if we could perhaps clone her and see if she could win a race. I can offer them an excellent deal. $10 now, and every week until they decide that there’s no way that they’ll ever get their money back, and pull out! But I doubt that most of them would ever want to pull out.

After all, it’d be shame to waste all that money and not have anything to show for it!

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19 comments

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  1. Annie B

    Rossleigh ….

    Thoroughly enjoyed this one … yes, enjoyed. …. It said so much, and pushed a good few buttons.

    As a Victorian, I believed that little ‘signing on the dotted line’ stunt, for the East West Link by the previous Liberal Government, showed exactly what they are capable of on the down and darker side of things, and more particularly, how they collectively think. ” Let’s bail the whole bloody lot up into corners – circle them, and then pounce for our own profits and greedy ends” …. typical Liberal.

    Didn’t work for Naptime, that time, did it ? . ….

    Andrews is doing a fast track job with his ideas, but the digging up of Swanston Street and therefore jiggering up CBD business over many months, for about 800 metres of track, which allegedly will accommodate approx. 20,000 more passengers ???????? …. Not the grandest idea anyone has had.

    But – give him his dues, he has implemented a lot of his pre-election promises, and that makes him a rarity in politics today – anywhere.

    As for the racehorse / filly – been there, done that. ….. Similar result, but with a horrid outcome from a fierce electrical storm lashed paddock that had pregnant broodmare – ( she had been a racehorse with a couple of wins, but a few physiological problems ), break her back in a panicked fall. …. I could have murdered the bloody trainer. Was beside myself with grief……. NOBODY leaves their pregnant horses out roaming in bad weather – but apparently some do !!! …. Would never be involved again. … and it wasn’t the money, it was the lack of care of the broodmares that had me so very angry.

    As for your very last statement – …. would someone kindly ( Liberals are welcome 😉 !! ) … show me what the current Federal mob have done, in wasting money on deity-alone-knows-what …. in their 18 months or so ‘understanding of money’ …. ?? e.g. the cost for a limp and suspect bod heading some weird Consensus in W.A., named Bjorn Lomborg – at taxpayers expense – only to exclusively serve the incumbent Government and their ill conceived ways. …… Bah bloody humbug !!

    Personally, I’ve had absolutely enough of this ridiculous Liberal mob …

  2. miriamenglish

    It is weird, isn’t it. All around the world conservative governments make a big song and dance about how important the money is (even more so than people, it seems). They constantly stress how necessary it is to be “fiscally responsible”. Yet all around the world it is always the conservatives who wreck economies and progressive governments who fix them up. And when governments that are traditionally progressive start to become conservative too, they also damage economies.

    It kinda seems obvious, when you think about it for more than a couple of seconds, that taking care of people is the best way to take care of the economy, because the people are the ones who generate the economy. Hurt the people and naturally the economy will take a beating.

    Why on Earth do these idiots still insist on describing what they do as “tough love” or “making the hard decisions”? They don’t love the poor; they despise them. And it certainly isn’t tough to hurt the people they dislike while enriching themselves and their mates. As for what they do to the economy and the country as a whole… do they even see reality? Or do they live inside a hermetically sealed ideological echo chamber?

  3. eli nes

    The warning is in the letters printed by murdoch’s editors emblazoned with the sentiments of ch9 watchers.
    I doubt if any of them suspect that the coalition borrowed money except to pay labor’s debt.
    The posts in the north show absolute ignorance of politics beyond labor’s debt and independent interference with the legitimate government.
    That and bbqs suggest dd with majority in both houses. Then little billy may…?

  4. Gangey1959

    Thanks Rossleigh.
    I don’t like horses.
    I just thought you all might like to know that you can’t have dr napthine’s address. I’ve already asked for it and been told no.
    I figure he signed the contracts, so all things being fair he can pay for them personally.
    I’ve got better things to spend my dollar on.

  5. Kaye Lee

    Tony Abbott – April 2013 (6 months BEFORE the federal election):

    ”There’s no way that a government facing an election, should be attempting to manipulate our country from beyond the political grave. In my view, the decision to announce these appointments subverts the established convention that no government should make decisions that are legitimately the province of a potential successor,” he wrote in the letter dated April 21.

  6. Wally

    Very happy with Daniel Andrews he could be the saviour of Australian politics, at last we have a real leader who is honest, keeps his promises and is basing his re-election on what he achieves in the first term instead of basing it on more hollow promises. He may not be the most chrematistic politician but he is a man with integrity, isn’t that refreshing?

  7. Kaye Lee

    Christine Milne has resigned!!!!

  8. Matters Not

    But only as the Leader. Will not contest next election.

    Who will be the new leader?

  9. Kaye Lee

    Adam Bandt seems the logical choice.

  10. Matters Not

    Scott Ludlam in the Senate? But there is other ‘talent’ as well. Peter Whish-Wilson for example.

  11. Jexpat

    Scott Ludlam is the safest choice, though Adam Bandt is the deputy, so presumably next in line.

  12. Rezblah

    Can the liberal party be sued or a class action brought against them for signing that contract?

    Whoever signed it should be covering the payout really, not the public.

  13. diannaart

    @Rezblah

    In a fair society the Liberal Party would pay for their crimes – this ain’t that society.

  14. diannaart

    @Jexpat

    I watched the news where Richard Di Natale repeatedly interrupted and spoke over Christine Milne – just the excitement of the moment I hope.

  15. Jexpat

    diannart:

    I didn’t see that, but given how quickly this all manifested it’s probably reasonable to assume that there’s wasn’t much time for preparation or practice.

    Regarding Adam Bandt, it occurred to me (as several sources noted) that, for the time being, he’s the sole member of the lower house, and the action and the numbers are in the Senate Caucus.

  16. diannaart

    I agree, Jexpat – besides the Greens probably need someone more assertive.

    On the money with Adam Bandt too – Greens have to spread themselves thin.

  17. Mark Needham

    The de-sal plant, also, should be just “cut”.
    Between the rort of “financing” the plant, and the rort of the “wages” building it……

    Whoever signed it should be covering the payout really, not the public.

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