I
you
hi I'm Mike greater and this psych exam
review in this video we're gonna look at
another potential error in our decision
making and this is the sunk cost fallacy
so the sunk cost fallacy refers to when
we make present decisions based on
previous investments so for instance a
gambler who's been losing money starts
making increasingly risky bets bet more
and more in hopes that they can make up
for those past losses now the reason
that this is a fallacy is that these
present odds of winning are not
influenced by the previous losses they
don't know that you've already lost a
bunch of money on this game and so it's
a fallacy to let those influence your
decision making we also see this with
speculative investors who've lost money
for themselves or for clients and so
they start making riskier and riskier
investments and they actually start
making investments that they would
otherwise never make right things that
just are not good investments they start
making them in hopes that one of them
will pay off and it will make up for all
those previous losses and again this is
a fallacy because those previous losses
don't have any influence on the present
investments so the important point here
is that this becomes a fallacy when
those past investments are not relevant
and that's most obviously the case when
we look at things like gambling or
making a new investment right because
you know the the blackjack table doesn't
know whether you've won or lost in the
past the same way investing in new
company isn't going to be influenced by
your previous successes or losses okay
so there are some situations where we
allow previous investments to influence
our present decision making but it's
probably not considered a fallacy and
the reason for that is those previous
investments are actually relevant to the
present decision made so for instance if
you're thinking about abandoning a
relationship or quitting your job these
are situations where you've made from
some pretty substantial previous
investments let's say you've been in a
relationship for the past five years and
so you probably want that to influence
your present decision-making right you
shouldn't just throw that relationship
away for no good reason because you know
that you don't get to start five years
in
the next relationship you have to start
all over again and so you're going to
have to reinvest a lot of time and
effort into a new relationship and
you've already invested that in this
current relationship so maybe you should
be careful in how readily you abandon it
similarly if you're thinking about
quitting your job because of you know
some minor annoyance right you should
maybe you think about just quitting your
job on a whim saying that's it you know
I'm out of here well if you think about
the previous investments that you've
made in this job maybe it doesn't make
sense to do that right because if you
quit your job now you have to start over
somewhere else you have to meet new
people learn how to work with them sort
of get a feel for the new culture in
this new work environment and that's
going to take a lot of time and effort
and maybe you've already invested that
time and effort into your present job
and maybe you should just view this as a
minor annoyance right rather than a
reason to quit job okay so why do we
make this sunk cost fallacy well some
research by Amos Tversky and Daniel
Kahneman suggest one possible
explanation for why this happens so what
tourists in common did was they asked
participants a question I'll read it you
here imagine that you have decided to
see a play where admission is ten
dollars per ticket as you enter the
theater you discover that you've lost a
ten-dollar bill would you still pay ten
dollars for a ticket to the play you can
think about what you would do and I'll
tell you that eighty-eight percent of
participants in this study said they
would still buy a ticket to shame I lost
ten dollars but I'm at the theater I
want to see the show haven't bought a
ticket yet so I need to buy a ticket now
what's worse kink anuman also did was
they did another variation of this
question and they ask some other
participants imagine that you've decided
to see a play and paid the admission
price of ten dollars per ticket as you
entered the theater you discover that
you've lost the ticket the seat was not
marked and the ticket cannot be
recovered would you pay ten dollars for
another ticket now in this case only
forty-six percent of the participants
said that they would buy another ticket
but it's really the same thing as the
first situation right I mean you
add something worth ten dollars and then
you lost it and then you wanted to see a
show right it shouldn't matter that the
ten-dollar thing that you lost was in
the form of a bill or a ticket it's ten
dollars either way so why are people's
answers so different well what diversity
and Kahneman suggested is it's because
people don't think rationally they don't
keep a single mental account of all of
their costs instead they keep separate
little accounts for the costs of
different things and so in the first
situation people lose ten dollars but
they when they think about their theater
costs it's not relevant you know ten
dollars but it wasn't part of the cost
of seeing the show so it doesn't count
and so I haven't paid anything to see
the show yet so of course I'll pay ten
dollars to see the show that's what it
costs but in the second situation what
happens is when they lose a ticket now
they start counting it in this mental
account for how much does it cost to go
to the theater and so now they look at
this theater account and it's already at
minus ten like it's already cost me ten
dollars to see this show I'm not going
to pay another ten dollars i mean i'm
not going to pay twenty dollars to see a
ten dollar show and so in this case
because of this separate mental
accounting they decide that it's too
expensive buy two tickets for the same
show and they don't want to buy another
ticket now we can think about how this
relates back to our sunk cost fallacy
and that if people kept a purely
rational single account they might not
be as prone to making this error but
what happens is they start separating
the costs of things into separate
accounts and they start thinking about
how much has it cost me at this
blackjack tape how much am i down here
you know geez I'm down two thousand
dollars that's really bad I can't let my
blackjack accounts it at minus two
thousand you know I need to win at
blackjack I need to make up for that
rather than thing you most single single
sort of rational approach who could be
you know down two thousand dollars I
probably shouldn't start making larger
and larger bets at the blackjack table
that's not very wise but instead they're
looking just at that single account and
saying I can't leave with my blackjack
account at minus two thousand I need to
do something to get that back up and the
only thing to do to get that back up is
to keep playing blackjack and hope that
you win alright so this gives us a
little bit of insight into why
sunk cost fallacy occurs I hope you
found this helpful if so please like the
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more thanks for watching