Crash through the surface, where sunk costs can’t hurt us.
According to Christopher Olivola, an assistant professor of marketing at Carnegie Mellon’s Tepper School of Business, “the sunk cost effect is the general tendency for people to continue an endeavor, or continue consuming or pursuing an option, if they’ve invested time or money or some resource in it. That effect becomes a fallacy if it’s pushing you to do things that are making you unhappy or worse off.” (1)
If you’ve ever gone to a concert just because you already purchased tickets, or if you’ve gone to pilates every morning to prove you are not wasteful and to make your “unlimited” monthly pass worth it, you are familiar with the sunk cost fallacy. Many of us have found ourselves in situations where we have put dollars, time or effort into something and we stick with the “original plan” even if that plan doesn’t suit you or the situation anymore. Unfortunately, the sunk cost fallacy occurs more frequently than expected and often leads to irrational decision making in ever day life.
Common (and personal) examples of the sunk cost fallacy are outlined below:
“Game of Thrones” Concert this week— This Thursday, I have a Game of Thrones Concert at Shoreline in Mountain View, 50 miles from San Francisco. At the time of purchase, which was ahead of the Season 8 premiere, I was obsessed with Daenerys Targaryen and the musical score associated with her and her dragons. However, now that the series is complete and that the ending did not exactly celebrate the dragon queen, I am not interested in going to this concert. In fact, it feels like a chore and a headache to travel to Mountain View during the week during a busy time at work and with my graduate school program. However, since the tickets were expensive, I feel obligated to go and not “waste” the money tied to the experience.
Pack of 10 Pilates Classes — Workout programs and classes can be a positive sunk cost in that the memberships are so expensive so you want to make sure you go every day to make the membership worth it. However, there could also be the other side of the experience where the pilates classes are not really doing anything for you but you have prepaid for 10 pilates classes as part of a discount or Groupon. Because you have paid for 10 classes upfront, you feel obligated to finish all 10 classes (and thereby 10 hours of your life) so you are not perceived as wasteful and you don’t leave anything on the table even if you are not getting anything out of the classes.
Don’t Waste Food — how many of us have gone to a restaurant and left feeling like a stuffed turkey? This example is a classic sunk cost fallacy. Essentially, individuals feel compelled to eat all of the food presented to them (whether in a formal dining setting or at a buffet) because they want to make the most of their money. If they are paying $12 dollars for lunch and they are too full to eat the large portion, they will continue eating until they clean the plate to make sure that the $12 was well worth it. And while I grew up with that type of mentality — after all my parents told me there were starving children in Asia who wouldn’t waste food — I am, like other individuals, only hurting myself by eating to the point of being uncomfortable.
Now that we are all familiar with the sunk cost fallacy and how commonplace it is in our lives, how can we notice it when it’s occurring and try to avoid it in the future? The key is to separate, and properly prioritize, the weight you place on your acquisition utility — i.e. how much you care about getting a “good deal” — and your consumption utility, or how you feel about the net impact of your choices at the end of the day.
SOURCES:
(1) https://time.com/5347133/sunk-cost-fallacy-decisions/
(2) https://www.thestreet.com/personal-finance/education/sunk-cost-14767636
(3)https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/
