Another reason for honoring the sunk cost of the movie ticket (related to avoiding regret) is that you know yourself well enough to realize you often make mistakes. There are many irrational reasons why you would not want to see the movie after all. Maybe you're unwilling to get up and go to the movie because you feel a little tired after eating too much. Maybe a friend who has already seen the movie discourages you to go, even though you know your tastes in movies don't always match. Maybe you're a little depressed and distracted by work/relationship/whatever problems. Etc.

For whatever reason, your past self chose to buy the ticket, and your present self does not want to see the movie. Your present self has more information. But this extra information is of dubious quality, and is not always relevant to the decision. But it still influences your state of mind, and you know that. How do you know which self is right? You don't, until after you've seen the movie. The marginal costs, in terms of mental discomfort, of seeing the movie and not liking it, are usually smaller than the marginal benefit of staying home and thinking about what a great movie it could have been.

The reasoning behind this trivial example can easily be adapted to sunk cost choices in situations that do matter.

The sunk cost fallacy is easy to understand and to point out to others, but I caution against using it too often. The point of the fallacy is to show that only future costs and benefits matter when making a decision. This is true, but in reality those costs and benefits (and especially their probabilities) are hard to define. It is not clear whether the extra information that was received after 'sinking' the cost has an impact on the cost and benefit probabilities. You also know that, in any case, if the decision to sink the cost in the first place was the right one after all, the decision to continue is even more rational as a large part of the cost has already been spent. You can go see a movie for free that other people still have to pay for.

Sunk Cost Fallacy

by Z_M_Davis 2 min read12th Apr 200944 comments


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?"