sunk cost fallacyYesterday, I went to the Discovery Leadership Summit in order to see Joseph Stiglitz and Ben Bernanke speak in person. I paid an inordinate amount of money for the ticket (inordinate!) – but I thought to myself “a heck lot cheaper than flying to America”. And then there was the added bonus of Trevor Manual and Adam Morgan (of eatbigfish fame).

Was it worth it?


But was it really though?

The Crisis of Emotional Attachment (AKA the Sunk Cost fallacy)

In theory, we’re all rational decision makers. We take into account the appropriate costs and the potential benefits and then we make a reasoned decision. It’s a fundamental assumption in orthodox economic theory.

But that’s not really how we act at all. We make snap judgements when we’re excited, depressed or hungry. Lust and alcohol are a cocktail of unfortunate outcomes. And then there’s sentiment, which brings me neatly to the fallacy of sunk costs.

The general idea is this: once you’ve paid for something, its cost should no longer be relevant in your decision making. Two scenarios:

  1. If I want to go for a mountain-bike ride, and I don’t own a mountain bike, then the cost of buying one features quite prominently in whether or not the whim will take me all the way to a cycle store and back before I head up the mountain.
  2. If I already own a mountain bike, then the cost of buying one should be irrelevant. That event has already come and gone. All that remains is to decide whether the lost hours of sleep are worth the smell of dew at first light and the self-satisfied sense of accomplishment that comes from having ridden 25km before breakfast.

But often, there’s guilt attached to not using the mountain bike after you’ve bought it. As though somehow you now owe it to yourself to use it. And that’s a clear example of what economists affectionately refer to as “the sunk cost fallacy”.

It also plays out in relationships. Particularly, in long-term relationships that have become vaguely toxic. Even though someone might be unhappy in that state, there’s a sense of “I’ve spent so much time and energy investing in this relationship that I don’t want to lose it”. And instead, they subject their partner to a steady dialogue of snipe, or wallow in a spiral of despondency.

In many ways, “sunk costs” are really just another variation of our innate loss aversion. We don’t like to make losses, and we hate to admit that we made a mistake. So the sunk cost fallacy is an attempt to make a past decision seem like a good one in retrospect.

The Overly Optimistic Probability Bias

There’s a classic psychological study on this that involves horse-betting. The study interviewed 141 horse bettors – 72 of which had just placed a $2 bet on a horse, and 69 of which were just about to place their $2 bets. The bettors were asked to rate the likelihood that their chosen horse would win on a scale of 1 to 7. People about to place the bet averaged 3.48 (ie. “a fair chance of winning”). The people that had already betted gave an average of 4.81 (ie. “a great chance of winning”).

The conclusion: we tend to think that our decisions are good ones after we’ve made them.

How That Played Out Yesterday

Because I’d paid for the ticket, I’d almost pre-determined that I was going to enjoy myself.

But if you forced me to be honest, Joseph Stiglitz basically repeated the inequality lecture that he gave at the LSE, which is available as a free download online. And actually, I was sitting so far away from the lecture podium that I ended up watching the whole thing on the large television screen that was set up to the left of the stage. As I did with all the other talks.

And sure, I ate lunch there. But I would probably have preferred a visit to the food court for a shwarma.

Thank God for it though

Frankly, I think that the sunk cost fallacy is evolution’s answer to disappointment. Can you imagine how depressing it would be if we all just flocked about being ruthlessly non-sentimental?

I’d rather leave a lecture feeling like it was worth it.