Sunk Cost Fallacy – Rolf Dobelli

Chapter: Why you should forget the past: Sunk Cost Fallacy.

I was an economic student, so terms like ‘opportunity cost’, ‘full cost’, and ‘sunk cost’ are quite familiar to me. I recently read this chapter about people making decisions based on the sunk cost, which means something that has already be done and should not be considered as a factor when making decisions. The author made use of an example about he and his girlfriend purchasing a $30 ticket, just to find out later that the movies was interesting. The author suggested leaving the theatre, because the $30 has already been paid. The cost involved in making the decision, whether to leave the theatre or not, should only be based on the amount of time that they will waste if they had chosen to continue watching the movie.

It was interesting because a ‘normal’ person would have chosen to stay in the movie theatre, because he/she has already paid the $30, and leaving the theatre would decrease the value of the $30 ticket purchased. In fact, that is a fallacy. When deciding whether you should stay in the movie theatre or leave, the only factor you should consider is the future time. If you continue to stay in the theatre for another hour just to finish watching the movie, your full cost would be the $30 + one hour, assuming that you did not enjoy the movie at all. If you choose to leave, then the full cost would be lowered, the nominal value of $30 only.

So I guess what I am trying to say is, stop thinking about something that has already been done, but rather, think about something that might get worse or better in the future. This is how you become a smarter consumer, and a more rational person.

 

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