Sunk Cost Fallacy


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Related to: Just Lose Hope Already, The Allais Paradox, Cached Selves

In economics we have this concept of sunk costs, referring to costs that have already been incurred, but which cannot be recouped. Sunk cost fallacy refers to the fallacy of honoring sunk costs, which decision-theoretically should just be ignored. The canonical example goes something like this: you have purchased a nonrefundable movie ticket in advance. (For the nitpickers in the audience, I will also specify that the ticket is nontransferable and that you weren't planning on meeting anyone.) When the night of the show comes, you notice that you don't actually feel like going out, and would actually enjoy yourself more at home. Do you go to the movie anyway?

A lot of people say yes, to avoid wasting the ticket. But on further consideration, it would seem that these people are simply getting it wrong. The ticket is a sunk cost: it's already paid for, and you can't do anything with it but go to the movie. But we've stipulated that you don't want to go to the movie. The theater owners don't care whether you go; they already have their money. The other theater-goers, insofar as they can be said to have a preference, would actually rather you stayed home, making the theater marginally less crowded. If you go to the movie to satisfy your intuition about not wasting the ticket, you're not actually helping anyone. Of course, you're entitled to your values, if not your belief. If you really do place terminal value on using something because you've paid for it, well, fine, I guess. But we should all try to notice exactly what it is we're doing, in case it turns out to not be what we want. Please, think it through.

Dearest reader, if you're now about to scrap your intuition against wasting things, I implore you: don't! The moral of the parable of the movie ticket is not that waste is okay; it's that you should implement your waste-reduction interventions at a time when they can actually help. If you can anticipate your enthusiasm waning on the night of the show, don't purchase the nonrefundable ticket in the first place!

You can view ignoring sunk costs as a sort of backwards perspective on the principle of the bottom line. The bottom line tells us that a decision can only be justified by its true causes; any arguments that come strictly afterwards don't count; if it just happens to all turn out for the best anyway, that only means you got lucky. The sunk cost fallacy tells us that a decision can only be justified by its immediate true causes; any arguments considered in the past but subsequently dismissed don't count; if you could have seen it coming, why didn't you?

Another possible takeaway: perhaps don't be so afraid to behave inconsistently. Rational behavior may be consistent, but that doesn't mean you can be more rational simply by being more consistent. (Compare with the argument against majoritarianism: the Aumann results guarantee that Bayesians would agree, but that doesn't mean we can be more Bayesian simply by agreeing.) Overcoming Bias commenter John suggests that you go so far as to pretend that you've just been dropped into your current life with no warning. It may be disturbing to even consider such a radical discontinuity from your past—but you can consider something hypothetically, without necessarily having to believe or act on it in any way. And if, on reflection, it turned out that your entire life up to now was a complete waste, well, wouldn't you want to know about it?—and do something about it?

Decision theory is local. Don't be afraid to ask of your methodology: "What have you done for me lately?"