Jimmy sells his catch at the local market. He knows that he can sell only fresh fish, so he
throws the bad ones away, regardless of the time it takes him to find, catch, and clean the fish.
Jimmy knows that if he were to sell spoiled goods, his customers would not return. So, instead of
crying over stale fish, he considers them as sunk costs and sells what customers actually want.
In his free time, Jimmy isn't’ that rational
Unlike fish that don't go to the movies, Jimmy does. He buys himself a ticket for the afternoon
show. But it turns out that a few hours before the film starts, his friends want to meet up to
play football, Jimmy's favorite sport. Since he has already spent the money on the ticket,
he declines the invitation. According to sunk costs theory, he shouldn’t have — the money
he spent on the tickets is already gone, and he won’t get it back by watching the movie.
What matters is that he has a good time.
Jimmy falls for the so-called sunk cost fallacy, the strong natural fear of losing
what we already own and the tendency of our brain to treasure all the things we possess.
A more famous example of the fallacy is the Concorde — the supersonic passenger plane.
Building the aircraft proved to be very difficult and expensive, but instead of shutting down the
project, the British and French governments continued funding it even though they knew the
aircraft would not have any economic benefit. They argued that they had invested too much to give up.
To test the sunk cost fallacy, economists Hal Arkes and Catherine Blumer came up with
an experiment using theater season tickets. The regular price for the season was $15,
but some people were randomly given discounts of either $7 or $2. It turned out that the people
who had paid the regular price attended more plays than those who received a discount. Interestingly,
the only ones who behaved rationally were children under the age of 6.
Behavioral economists suggest that there are three psychological reasons for our irrationality.
1. Loss aversion: people prefer avoiding losses to acquiring equivalent gains — most
avoid bets where they can win $50 because they could also lose $50.
2. The desire not to appear wasteful: this is why some finish their food even
when they feel full or don’t think it’s particularly tasty.
3. To ensure we do things we fear we otherwise wouldn’t:
We might buy expensive gym membership to make sure we actually go and work out.
Assuming you are immune to the Concorde fallacy and you could completely ignore
all investments you have ever made into your education or getting to where you are today:
What would you be doing differently going forward? Can you identify any
'sunk costs' that are holding you back from making those changes?
If you found this helpful, check out our other videos and subscribe.
If you want to support our work, join us on patreon.com/sprouts.
For more information and additional contents, visit sproutsschools.com