The fallacy of sunk costs on the Iron Range

Part of a taconite plant under construction at Essar Minnesota’s Nashwauk project in May 2015. The project remains unfinished and in doubt. (Aaron J. Brown)

Aaron J. Brown is an Iron Range blogger, author, radio producer and columnist for the Hibbing Daily Tribune.

“You’ve got to know when to hold ‘em,
know when to fold ‘em;
know when to walk away,
and when to run.
~Kenny Rogers, “The Gambler”

Observe the haphazard dashes of spray paint on plywood signs along the roads of the Iron Range. They tell you what people think their stuff is worth.

“$2,000 or best offer.”

“$500 firm.”

“Free. You haul.”

You see the same at rummage sales or in the classifieds. And most often we drive by and say, woof. No way. That’s way too high.

Not to the seller, though. They paid full price. They won’t settle for less. Pride is at stake.

It’s part of what we call the “sunk cost fallacy.”

Madeline Grant wrote about the sunk cost fallacy in a Sept. 17 BBC essay “The Trick to Learning When to Cut Your Losses.” She’s the editorial director for the Institute of Economic Affairs. She argues that we tend to overvalue investments we’ve already made and undervalue our ability to walk away and do something different.

“… People are loath to cut their losses,” writes Grant. “We are much more likely to continue to senselessly plough time or money into a project that isn’t working out, in the hope that it will get better, than take a hit and walk away. What drives this is optimism (that, against the odds, the situation will improve) and an aversion to failure.”

And it occurs to me, the fallacy holds far too much sway over us in Northern Minnesota.

Here in Hibbing, officials debate the fate of the Public Utilities Commission power generation and steam plant. The plant has been in its current location for almost 100 years, so long that everyone alive grew up in its steam-smoky shadow.

But today, financial problems bedevil the organization. Honest disagreements exist over how bad the problem is. But all signs point to an aging plant too inefficient to keep running forever in a town that has shrunk since it was first built.

In 2019, the Department of Iron Range Resources and Rehabilitation will again deliberate the fate of $9.1 million in loans given to Excelsior Energy for its failed Mesaba Energy Project coal gasification plant.

Five years ago, the IRRRB agreed to defer the loans without requiring interest payments because, many members declared, it was the only chance they had to get the money back. That’s literally the definition of the sunk cost fallacy.

More than a decade ago, the state of Minnesota invested tens of millions into infrastructure for the Essar Steel plant outside Nashwauk. Today, we find the project mired in failed financing and competing interests. It’s entirely possible that everything built on site will need to be redone or even removed.

In her article, Grant quotes a social psychologist, Dr. Jim Everett, who reminds that we are all susceptible to the fallacy of sunk costs. He says we can avoid the fallacy by stepping back and looking at the big picture.

Ask “what would I gain or lose if I stuck with this option, and what would I gain or lose if I switched?” Look back at the entire chain of decisions that led to that point and ask if the information that guided those decisions was true or false. Then ask, if presented with the same decision to make again, “would we do the same?”

The good thing is that we can ask all of these questions when it comes to public policy on the Iron Range and come up with real answers. Those answers can shape a better way forward. We must be willing to look.

The Hibbing PUC site sits between the downtown and Bennett Park. It could become a valuable site for commercial or residential development that would draw more people downtown.

Perhaps the IRRRB can’t get all of its $9.1 million back from Excelsior Energy. Nevertheless, this lesson could establish a new path of transparency and strategic planning for the region’s economic development projects.

And we can learn a great deal from the Essar project, perhaps finally emphasizing the importance of working with existing companies to add value to iron ore production on the Iron Range. In this, the region could make the jump from taconite to pure iron for electric-arc furnaces.
We should not be afraid of failure. We should be afraid of not learning from failure.

That’s how we beat the sunk cost fallacy.

Aaron J. Brown is an author and college instructor from northern Minnesota’s Iron Range. He writes the blog MinnesotaBrown.com and hosts the Great Northern Radio Show on Northern Community Radio. This piece first appeared in the Sunday, Dec. 9, 2018 edition of the Hibbing Daily Tribune.