When Sunk Costs Make us Happier

April 4th, 2016

Sunk costs are non-recoverable investments of time or money. Since sunk costs were already spent (i.e., we can't re-spend the $100 that we already spent on non-refundable soccer tickets), it’s irrational to include them in our decision making. The fact that we spent $100 on soccer tickets should not influence whether we subsequently attend the game; we spent $100 regardless of our future choice. However, we frequently make decisions based on sunk costs; we decide to attend the cold and rainy soccer game even though we’d prefer to watch it from the comfort of our home, simply because we feel attached to the $100 we already spent. This error is called the sunk cost fallacy.

 

While sunk costs often lead to bad decisions (e.g., over-investing in a dead end project, a failing relationship, or a boring book), we can harness this bias for good. A few obvious examples come to mind:

 

Gym: Even though the gym membership is a sunk cost, some people visit the gym more frequently in order to lower the effective unit cost. While using the gym more often “because I paid for it” is irrational, this sunk cost-based thinking likely leads to a positive outcome.

 

Attire: After investing in an expensive clothing article, such as a tuxedo, tailored suit, or a designer purse, we often look for occasions where we can make the most of our purchase. Perhaps we attend more parties, meet new people, feel more confident, or receive more compliments as a result. There’s little harm in falling prey to the sunk cost fallacy in this way.

 

Vacation Properties: Once we spend money on a timeshare or a vacation home, we may feel a need to vacation more in an attempt to make the most of our investment. Given that most vacation days go unused, the sunk cost fallacy might nudge us in a normatively positive direction.

 

Our biases around sunk costs suggest a general strategy in which we should make investments in domains that lead us to behaviors that we normatively prefer. By tapping into our deep tendency to feel drawn to sunk costs, we can potentially harness our biases to help achieve our goals.