Via a Twitter friend:
It’s funny because it’s true, and I’ve been trying to explain this to people for years. (In related news, economists don’t have a reputation for being particularly romantic.) In case you’re not familiar, sunk costs are costs that you’ve already paid and can’t recover- i.e. you can’t get your money back. Rationally, sunk costs shouldn’t factor into decision making because they are, since they’ve already been incurred, present in every possible outcome and therefore can’t affect the relative appeal of different options. For a Valentine’s themed illustration, consider the following: you purchase a box of chocolates, only to find that all of the chocolates are of the gross coconut-filled variety (seriously, who likes those?)- do you continue to eat the chocolate because, gosh darn it, you paid for it and you’re going to get your money’s worth, or do you chuck the heart-shaped box into the nearest trash can ASAP, saving yourself both empty calories and the pain of choking down substandard goodies? If you’re rational, you’d choose the latter option (or at least find that one person who is apparently keeping the coconut-filled Valentine’s chocolate industry alive and given them a nice gift), since “getting your money’s worth” is only going to make you less happy.
In practice, people are not always good at ignoring sunk costs, even though it would be reasonable to do so. Some empirical evidence:
- People report being less likely to purchase a replacement movie ticket than the original ticket, even though the two decisions are nearly identical (unless one is so cash constrained that the wealth difference between the two choices actually becomes a limiting factor). Sometimes people try to justify their choice by saying “Why would I pay twice to see the movie?” and I counter with “Why would you pay once to not see the movie?”
- People are less likely to attend concert events when they are randomly given a discount on their season tickets after they’ve decided to purchase the tickets.
- People often report being “pot committed”> in poker, when, rationally, whether the money in the pot is your or someone else’s should have no bearing on whether you raise or fold.
- If people were good at ignoring sunk costs, the phrase “throwing good money after bad” would have never been invented.
If you’re curious, you can see more fun with sunk costs in Richard Thaler’s “Mental Accounting Matters.” Thaler even gives a potential explanation for why people tend to ignore sunk costs- in his mental accounting framework, people only explicitly evaluate transactions that are exceptions to the ordinary, so they fail to notice that, for example, they would be paying to not go to the movie and instead only focus on the potential of paying twice to go to the movie. Therefore, it’s not hard to see how ignoring sunk costs could lead to faulty reasoning along the lines of “well, I’ve put so much into this relationship already, I basically have to see this through.” (Like I said, we’re a romantic bunch.)
Isn’t it nice that you can get a valentine and a life lesson in one? I have to admit, however, that this is my favorite nerdy valentine thus far:
Or, if you prefer your valentines to be of the “real” sciences form instead, check these out. Personally, I’m giving this one to my students: