ILLUSTRATION 3.1 Is Cost-Benefit Analysis Really Useful? their losses this way are following sound economic We have extolled the usefulness of marginal analysis rules: calculating the net benefits of alternative courses in optimal decision making-often referred to as cost- of action, writing off past costs that can't be recovered, benefit analysis-in business decision making as well as and weighing the opportunity to use future time and decision making in everyday life. This process involves effort more profitably elsewhere." weighing the marginal benefits and marginal costs of The findings: Among faculty members, those an activity while ignoring all previously incurred or who use cost-benefit reasoning in this fashion had sunk costs. The principal rule is to increase the level of higher salaries relative to their age and departments. an activity if marginal benefits exceed marginal costs Economists were more likely to apply the approach and decrease the level if marginal costs exceed marginal than professors of humanities or biology. Among benefits. This simple rule, however, flies in the face of students, those who have learned to use cost-benefit many honored traditional principles such as "Never analysis frequently are apt to have far better grades give up" or "Anything worth doing is worth doing than their SAT scores would have predicted. The well" or "Waste not, want not." So you might wonder more economics courses the students had taken, the if cost-benefit analysis is as useful as we have said it is. more likely they were to apply cost-benefit analysis It is, at least according to an article in The Wall outside the classroom. The director of the University Street Journal entitled "Economic Perspective Produces of Michigan study did concede that for many Steady Yields." In this article, a University of Michigan Americans cost-benefit rules often appear to conflict research team concludes, "Cost-benefit analysis pays with traditional principles such as those we previ- off in everyday living." This team quizzed some of ously mentioned. Notwithstanding these probable the university's seniors and faculty members on such conflicts, the study provides evidence that decision questions as how often they walk out on a bad movie, makers can indeed prosper by following the logic of refuse to finish a bad novel, start over on a weak term marginal analysis and cost-benefit analysis. paper, or abandon a research project that no longer "Economic Perspective Produces Steady Yield," The Wall looks promising. They believe that people who cut Street Journal, March 31, 1992