I assert that the sunken cost "fallacy" is actually a quite sophisticated mechanism of human reasoning. People who take into account sunken costs in everyday decisions will make better decisions on average.

My argument relies on the proposition that a person's estimate of his own utility function is highly noisy. In other words, you don't really know if going to the movie will make you happy or not, until you actually do it.

So if you're in this movie-going situation, then you have at least two pieces of data. Your current self has produced an estimate that says the utility of going to the movie is negative. But your former self produced an estimate that says the utility is substantially positive - enough so that he was willing to fork over $10. So maybe you average out the estimates: if you currently value the movie at -$5, then the average value is still positive and you should go. The real question is how confident you are in your current estimate, and whether that confidence is justified by real new information.

You give no examples as to which situations you actually come out ahead from believing in the sunk cost fallacy, and your justification for it amounts to no more than the fallacy itself. "You thought at some point this was a good idea, so you should probably keep doing it."

New information should not be averaged with ignorance. When you did not know how you would feel that night, you thought it likely you would want to see the movie. but now you KNOW you don't feel like seeing it. This should have a much stronger effect on your decision than the prior data you had. You're not averaging two relatively similar pieces of data, you're putting together more accurate information with information that's basically a guess.

3Yasser_Elassal11yYour utility estimates at any given time should already take into account all of the data available to you at that time, including your previous estimates. In other words, if you decide you don't want to go to a movie you've already purchased a ticket for, that decision has already been influenced by the knowledge that you did want to go to the movie at some point, so there's no reason to slide your estimate again.

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?"