Friday, July 09, 2010

Governments, Private Organizations, and Sunk Costs

Over the last few days, I have become embroiled in a controversy within the Society for Creative Anachronism, a historical recreation group of which I have been a reasonably active part for about forty years; an earlier post mentioned it. The people running the SCA's largest event, a two week camping event with about ten thousand participants, announced without prior discussion a new rule for the event that many active participants, myself among them, saw as catastrophically bad. In response to an extensive online outcry they somewhat modified the rule, while making it clear that they were not willing either to explain and discuss their reasons or to suspend the rule for this year—the event starts in a few weeks—and discuss it for next. The controversy is still ongoing, and what the final outcome will be is as yet unclear.

Reading the news today, I noticed a story on the outcome of a similar case in a different context—one I am also involved in. Blizzard, which runs (among other things) World of Warcraft, had announced that in the future people posting to its online forums would have to provide their real names. That too set off a firestorm of negative reaction. In that case, it worked—Blizzard has just announced that it is canceling the change.

In each of these cases, one group of people—Pennsic staff or Blizzard—is making a decision which will have a large effect, arguably negative, on a very large number of other people. In each case, those affected have no formal right to a say in the decision. But in each case, the people affected have informal ways of both expressing their views and putting some pressure on those making the decision. Blizzard does not want to lose customers, and the people running Pennsic are long term SCA members who, if nothing else, do not want to be viewed by their fellow hobbyists as arrogant and incompetent. As one person in the discussion put it:
... in the Society, real wealth is the ability to say "I have an idea" and have people agree to work to support it. The rarest coin of the realm is when other people give you chunks of their leisure time.


Losing the confidence that others have in you, that you can make things fun for them, is SCA Bankruptcy.
The obvious analogy is to governments, which make decisions for other people on a much larger scale. In theory, democracy lets the people affected control things, but it is a very imperfect form of control for familiar reasons. Governments are in that position because they can use force to make people obey them. Blizzard and the Pennsic staff are in that position because the affected people have spent a lot of time and effort doing things within the framework of the game or the Society, and so cannot vote with their feet without, in effect, throwing away much of what that time and effort has bought them. In the jargon of economics, they have large sunk costs.

The analogy raises an obvious question. Would it be better if Blizzard and the SCA followed the democratic model, with participants voting to decide who was in a position to make decisions? It is an option that some people have proposed, and argued for, in both contexts.

On the whole, it does not strike me as a good idea. For a polity with a substantial population—tens of thousands for the SCA, millions for Blizzard—democracy works poorly, for reasons familiar in public choice theory. The alternative, a mix of social pressure and market pressure, is probably a less bad solution, even though the market pressure is seriously weakened by the sunk cost problem. One piece of evidence that it is a better solution in the view of those directly affected is that Blizzard does not have a successful competitor that attracts customers by giving them a vote over how the game is run.

In both cases there is a third alternative—moving the relevant parts of what people are doing out of the control of those who, in many people's view, are controlling them badly. Players of World of Warcraft can, and do, set up their own web sites with their own forums. If Blizzard had maintained its policy, more, perhaps in time most, of the online discussions would have moved to such forums. The Pennsic staff controls the classes they run. But if my objection to the new rule is sufficiently strong, I have the option of cancelling the classes I had planned to teach within the Pennsic University and reconstituting them elsewhere, ideally in a private encampment near the places where they were originally scheduled. It is an option that, at this point, I am seriously considering.


P.S. The Pennsic staff, under pressure, withdrew the controversial rule, explaining that other SCA people had volunteered solutions to the problems that had required to it. The statement contained no suggestion that the rule had been a mistake. The policies that were supposed to substitute for it included one that had been effect for years, another targeted at a problem that had little to do with the original rule, and a third dealing with a rare problem for which there were easier solutions.

The classic definition of chutzpah is the man who, after killing his mother and father, asks the court for mercy on the grounds that he is an orphan. Publicly thanking people for offering solutions to a problem after publicly announcing your unwillingness to tell them what the problem is comes close.


Brandon Berg said...

In the jargon of economics, they have large sunk costs.

That doesn't sound quite right to me. Sunk costs should be irrelevant to future decisions. I don't know what the economic jargon is, but I'd describe it as nonportable assets which are expensive to replace.

Jonathan said...

I think your proposal is often referred to as "voting with your feet". Seems a good idea if feasible. Unlike conventional voting, it's non-coercive, and it achieves some effect regardless of what other people decide to do.

Anonymous said...

Sunk costs should be irrelevant to future decisions.

Yes, rationally, they should be, and that's one of the best-known examples of how actual human beings do not act like rational choosers.

However, I agree that "sunk costs" isn't quite the right concept here. People who have spent many years in the SCA have made an investment of time that they expect to be repaid in friendships, fun, etc. This recompense will be substantially reduced if they stop playing SCA, so it's not irrelevant to future decisions.

David Friedman said...

I don't want to go into details on the relevant economics--you can find them in Chapter 13 of my Price theory, webbed at:

or, for those who have my Hidden Order, in chapter 13 of that. But the pattern I am discussing is indeed a result of the logic of sunk costs.

Karl said...

At least it's possible to set up your class in some other encampment. If Pennsic had the power to enforce a monopoly, things might be different.

Anonymous said...

It's possible to move a class (and I encourage teachers to do so), but it's not free. The teacher has to take on the burden of communicating that change, as surely the A&S staff will not. I really hope a noticeable number of teachers will do it anyway, though. (I didn't sign up to teach this year so, alas, I have no class that I can visibly withdraw/move.)

Wonks Anonymous said...

Sounds like people were threatening Exit using their Voice while retaining Loyalty to the enterprise. Someone should write a book about such phenomena.

David Friedman said...

With regard to Wonk's comment ... .

It's partly that. And it's partly the demonstration that exit doesn't have to be total. I'm exiting from the Pennsic University while remaining in Pennsic. I could exit from Pennsic while remaining in the SCA.

Alexx Kay said...

Blizzard does not have a successful competitor that attracts customers by giving them a vote over how the game is run.

I'm not sure whether you'd call them a "successful competitor" (much smaller population, but healthy retention and growth), but EVE Online takes significant player input via a democratically elected "Council of Stellar Management" (

Unknown said...

This is similar in concept to a boycott. Unfortunately, that word has been diluted. (People "boycott" BP when the Exxon station is on the next block. How heroic.) A "real" boycott requires actual sacrifice on the part of the boycotters, and the intent is not spite or economic punishment, but a change in policy.

BobW said...

"Publicly thanking people for offering solutions to a problem after publicly announcing your unwillingness to tell them what the problem is comes close."
(emphasis added)

Why do I smell lawyers? Could they have thought that they had run into the sort of nasty problem that triggers lawsuits?

Xerographica said...

Ah..."sunk costs". The other day I was debating with somebody the merits of voting with your feet versus voting with your taxes and all that came to mind was that people put down roots.

Ideas can't get far without labels. As far as I can tell nobody has labeled or advocated the "vote with your taxes" idea so I took the liberty of labeling it "pragmatarianism".

Deng Xiaoping said that he didn't care if a cat was black or white, as long as it caught mice. Likewise, it shouldn't matter whether an organization is public or private as long as it produces "public" goods efficiently.

With pragmatarianism, the invisible hand would decide the most efficient division of labor between the private and public sector. If the private sector can truly produce all goods more efficiently than the public sector...then the eventual result would be anarcho-capitalism.