It’s Friday night and you and your significant other are planning to have your weekly date night. You bought tickets yesterday to see the latest drama at your favorite movie theater so you could get the seats that you wanted. All day you are looking forward to seeing the movie and you have seen at least 50 commercials promoting the thing. Your coworker Dave asks what you are up to later that night and you tell him the movie you plan to see. “Ah that movie stunk.” Dave replies. “You and your girlfriend should come out with us tonight for drinks.” Disappointed in Dave’s review of the movie, you are intrigued by his invitation and would love to go out for drinks. The only problem is, you already bought the tickets for the movie tonight. “It would be a waste not to go see this movie now” you tell yourself and you respectfully decline Dave’s offer. As the night approaches and you and your date head to the movies you mention to her that Dave from work invited you two out for drinks. She loves the idea but agrees that it would be a waste not to see the movie you paid for. Halfway through the movie you are tuned out and agree with Dave’s two-thumbs down review. As you sit there you wonder if you still have time to catch Dave at the bar. You quickly dismiss those thoughts with a “nah I have to finish this movie, I paid for it.” The movie ends and you wake up your date to leave the theater. Bummed, you can’t help but feel like you missed out on a fun opportunity.
We so often fall into this trap. We feel if we have already spent money on something or invested time into something that we have to continue doing it even if we don’t enjoy it. This is called the Sunk Cost Fallacy.
In economics, a sunk cost is defined as a cost including time and money that has already been incurred and cannot be recovered. Economists see sunk costs as neither a “fixed cost” nor a “variable cost” and do not consider sunk costs when evaluating an investment decision. While this may be seen as efficient in circumstances for a business, for an individual it is not wise to treat sunk costs this way.
As humans we thrive off of emotions. As mentioned in my previous article every decision we make has an opportunity cost. This opportunity cost often times becomes ignored when a sunk cost is introduced. Behavioral economists Amos Tversky and Daniel Kahneman covered the sunk cost fallacy in their book “Thinking Fast and Slow.” Khaneman stated that every decision we make involves a degree of uncertainty about the future. Our brains combat the uncertainty with their very own automation system for how to proceed when a potential for loss emerges. Loss aversion, which was also covered in my previous article, is our human tendency to avoid losses even at the cost of gains. Losing something hurts us twice as much as gaining something makes us feel good. Khaneman continues by saying that organisms that place higher urgency on avoiding losses as opposed to maximizing opportunities are more likely to pass on their genes. Thus overtime loss aversion has become a more powerful motivator than opportunities for gains.
So how does the sunk cost fallacy look in 2017? Let’s take a look at the all familiar Starbucks app.
Starbucks is well aware of your behavior and knows how the sunk cost fallacy works. Have you ever used their app and wished you could just pay through the app for the amount that you owed in that single transaction without having to load a minimum of $10 onto the app first? Well, there is a reason Starbucks wants you to add money to the app. They even encourage you to use their auto-reload feature that will reload a desired amount of money onto your card once your balance falls below a certain amount. So why is this beneficial to them? They know that once you have uploaded the money onto the app, you will treat it as a sunk cost. Sure you pass that new, hip coffee shop every day that you have been wanting to try but then you remember that you have $20 uploaded into your Starbucks app. This keeps you from trying that new coffee spot and ensures that you come back to Starbucks. If that wasn’t enough to keep you coming back, they have their gold star program that reminds you of the time you have invested into your lifespan as a loyal Starbucks customer. You just can’t wait to be promoted to a gold level account so you continue uploading money to your account.
This same concept is being utilized by many companies through their loyalty programs all in attempt to make you a repeat customer. What are some companies that you can think of that has a similar program set up? Share a story of a time you have fallen victim to the sunk cost fallacy below in the comments.
We all fall victim to the sunk cost fallacy so don’t feel defeated. However, next time you catch yourself in a situation where you are doing something simply because you have invested the time and/or money, take a step back and evaluate your alternatives along with your happiness level.