The Sunk Cost Fallacy

To terminate a project in which $1.1 billion has been invested represents an unconscionable mishandling of taxpayers’ dollars. – Senator Jeremiah Denton, 1981 (in response to critics who showed that the total cost of this Waterway Project would be more money than it could ever make)

I’m going to describe an experience that my psychophilosophy powers tells me you’ve had:

Not long ago, you went out to eat and ordered a meal your taste buds disagreed with. However, even though you didn’t enjoy the food, you continued to chomp and swallow it because you paid for it—and you should get your money’s worth, right?

I and a friend once waited for 2 hours to purchase bikes at a very discounted price. However, when we finally got to the front of the line, my friend didn’t find any bikes that interested him. Still, he still purchased one. His logic: He waited so long, he should get something for his efforts, right?! That bike now sits unused in his basement.

But think about that logic for a moment. First, what would bring you more happiness: eating food you dislike or not eating food you dislike? In both cases, there’s no way to get your money back (unless you do some complaining), so why force yourself to continue suffering the unappetizing meal?

In another example, let’s say you bought an expensive ticket to see a 3D movie. However, shortly into the film, you realize that it’s worse than Dumb and Dumberer. After already paying that money to see the film, though, would you continue to waste your time and watch it?

Probably.

Both of these examples demonstrate what’s known as the sunk cost fallacy, the irrational behavior where people continue to invest future resources (e.g. time) into a situation which has proven to be a poor investment (e.g., that terrible 3D movie).

In the original research on this phenomenon, participants read about a scenario where they accidentally purchased two ski tickets for the same weekend, one to Michigan (for $100) and the other to Wisconsin (for $50). Although the Michigan one was more expensive, the Wisconsin trip was described to be objectively more enjoyable.

Even big projects are susceptible to the sunk cost fallacy. After investing millions of dollars, what company would want to back out–even if the design was proven unsustainable or a new, better option existed?

The question then: Without any time to sell a ticket or get a refund, which trip would you go on?

Using strict rationality, 100% of the participants should’ve chosen Wisconsin (as this trip would actually provide more fun); however, over 50% of people chose the Michigan trip! That is, even though this trip was described as objectively worse, people still chose it because they had paid more for it.

In another study, researchers went to Ohio University’s Theater and waited for people to purchase season tickets. For one-third of the customers, the researchers sold the tickets at full price. For another third of customers, they sold the tickets with a mild discount. For the final third, the researchers sold the tickets at a moderate discount.

Then, the researchers tracked how many plays each customer actually went to.

As it turned out, those who had paid the most money for the tickets (i.e., the no discount group) ended up attending the greatest number of plays. That is, because they had invested the most resources, they were the ones most likely to invest future resources (i.e., their time), when they may or may not have wanted to keep going.

Imagine you invested a lot of time researching which television to purchase, and you finally come to a decision. However, right as you go to purchase it, you realize it will be difficult to finance. However, are you willing to sacrifice all that time researching to avoid this bad purchase? If not, that’s the sunk cost fallacy.

Now, there have been a number of explanations in explaining the sunk cost fallacy. For example, rather than being “wasteful,” we would rather make sure that our resources went to something—even if that something is undesirable. Other accounts posit that because we have already lost resources through this “sunk cost,” abandoning the investment (even though it’s the rational decision) feels like an even worse loss.

Fortunately, as we get older, research suggests we get better at avoiding this fallacy; however, the phenomenon itself is a rather robust one, not only common among humans but apparent in pigeons, too.

So, the next time you read one of these blog posts and you get bored halfway through, don’t think you have to continue reading to “justify” the amount of time you already put into it. But let’s be real—when have you ever been bored with these posts?

…oh, you have? Well, just keep that to yourself.

Costily,
jdt

Psychophilosophy to Ponder: Under each of the pictures today, I’ve included some more examples of the sunk cost fallacy. Now, can you think of some examples from your own daily life? How can recognizing these make you a better decision maker?

 

Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behavior and human decision processes, 35(1), 124-140.

Navarro, A. D., & Fantino, E. (2005). The sunk cost effect in pigeons and humans. Journal of the experimental analysis of behavior, 83(1), 1-13.

Strough, J., Mehta, C. M., McFall, J. P., & Schuller, K. L. (2008). Are older adults less subject to the sunk-cost fallacy than younger adults?. Psychological Science, 19(7), 650-652.

Author: jdt

Jake writes weekly posts every Wednesday on the intersection of psychology and philosophy. To learn more about him, or to propose a topic you'd like him to cover, go to https://everydaypsychophilosophy.com/contact.

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