Sunk costs are a favorite subject of economists. Simply put, they are payments, investments or costs which can never be recovered. An android with fully functioning logic circuits would never make a decision which took sunk costs into account, but you would. As an emotional human, your aversion to loss often leads you right into the sunk cost fallacy.
Loss aversion is one of your strongest drives. You know a confirmed loss lingers and grows in your mind, becoming larger in your history than it was when you first felt it. Whenever this clinging to the past becomes a factor in making decisions about your future, you run the risk of being derailed by the sunk cost fallacy.
Hal Arkes and Catehrine Blumer created an experiment in 1985 which demonstrated your tendency to go fuzzy when sunk costs come along. They asked subjects to assume they had spent $100 on a ticket for a ski trip in Michigan, but soon after found a better ski trip in Wisconsin for $50 and bought a ticket for this trip too. They then asked the people in the study to imagine they learned the two trips overlapped and the tickets couldn?t be refunded or resold. Which one do you think they chose, the $100 good vacation, or the $50 great one?
Over half of the people in the study went with the more expensive trip. It may not have promised to be as fun, but the loss seemed greater. That?s the fallacy at work, because the money is gone no matter what. You can?t get it back. The fallacy prevents you from realizing the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past.
Kahneman and Tversky also conducted an experiment to demonstrate the sunk cost fallacy. See how you do with this one.
Imagine you go see a movie which costs $10 for a ticket. When you open your wallet or purse you realize you?ve lost a $10 bill. Would you still buy a ticket? You probably would. Only 12 percent of subjects said they wouldn?t. Now, imagine you go to see the movie and pay $10 for a ticket, but right before you hand it over to get inside you realize you?ve lost it. Would you go back and buy another ticket? Maybe, but it would hurt a lot more. In the experiment, 54 percent of people said they would not. The situation is the exact same. You lose $10 and then must pay $10 to see the movie, but the second scenario feels different. It seems as if the money was assigned to a specific purpose and then lost, and loss sucks. This is why Farmville is so addictive people have lost their jobs over it.
