You have tickets for a basketball game in a city 45 minutes from your home. But the star is not going to play, nothing hangs on the outcome and it’s raining hard. Suppose you paid $100 for the tickets. Would you go to the game or stay home?
A municipal hospital in your area is obsolete. The city can build a replacement or it can remodel the old one, which was extremely expensive to construct. The quality and the cost would be about the same either way. Which course would you choose?
A hot new restaurant is getting phenomenal reviews. You wait three hours for a table. But when your beef stroganoff arrives, it’s flavorless, and you realize you’re not that hungry. Do you finish your plate?
If you’re like most people, you probably feel that $100 is just too much money to throw away, and you should therefore attend the game. Likewise, you vote to remodel the old hospital, because building a new one seems profligate. And you eat every bite of that bland entree, because you invested so much time in your meal.
An economist would do none of these things.
If you think like an economist, you tell yourself: “The rest of my life begins now. What happened in the past is irrelevant.”
It doesn’t matter that you paid a lot for the basketball ticket, because you won’t get your money back by attending the game. And it doesn’t matter how much the city spent constructing the old hospital, or how long you waited for a table at the fancy restaurant — because these are all “sunk costs.”
If you sit through a lousy movie instead of walking out, you’ve paid twice — once for the ticket and once for the viewing. You should consume a thing, or participate in an event, or work on a project only if those activities have current value.
Why is this basic principle, which is so easy to grasp, so difficult for most people to follow? There are two reasons.
The first is what psychologists call faulty framing. We mistakenly yoke the decision to continue an action to costs already incurred. But “waste not, want not” applies only to resources not yet expended. You can’t waste vanished resources.
A second reason is the need to avoid painful cognitive dissonance. The knowledge that you paid a lot for a ticket is dissonant with the realization that it isn’t actually worth all that much. And dissonance hurts, so you are strongly motivated to resolve the tension.
You could try to convince yourself that the loss of $100 is no big deal (“it’s only money”) and that it’s therefore OK to stay home, but that’s easier to do if you’re rich than if you’re not. Or you could manufacture some reason to attend the game: “Smith’s not playing, but that gives Jones a chance to strut his stuff. Plus I really don’t have anything to do tonight, and it sounds like the rain is letting up. Good. I’ll go.” Money not wasted. Dissonance resolved.
Countless psychology experiments have shown that when we pay a high cost for something that turns out to be disappointing, we find added attractions that make the object or activity seem more worthwhile.
If you’ve been served a crummy beef stroganoff after a long wait, you have to make a choice. You can leave it largely uneaten and suffer a painful “loss” — or you can “discover” some nice things about the meal. “Really, this beef stroganoff isn’t so bad. The flavor isn’t the very best, but the meat is quite tender.”
But such mental jujitsu isn’t inevitable. There’s a better way to live. Even if you’re not an economist, you can teach yourself to act more rationally.
First, learn to keep a mental balance sheet that distinguishes between past costs and future costs.
Second, recognize that activities carried out to justify sunk costs usually involve an opportunity cost as well. Because you’ve decided to choke down the stroganoff, you won’t take a stroll and buy a good hot dog. Because you’ve chosen to watch a so-so sporting event, you won’t have time to read a good book.
Third, try to figure out whether you really want to do something, or if you’re just trying to reduce the dissonance of having paid too much for too little.
Here’s a helpful trick: Imagine you hadn’t waited hours for the stroganoff. Would you still eat it? Imagine you hadn’t already paid for the basketball ticket. Would you buy one? If your answer is “no,” then you should put your fork down, and stay home.
Richard Nisbett is a professor of psychology at the University of Michigan and the author of “Mindware: Tools for Smart Thinking.” He wrote this article for the Los Angeles Times.