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I was traversing the web with examples about the sunk cost fallacy, and bumped into some example that a bit confuses me. The example is taken From here (https://market.subwiki.org/wiki/Sunk_cost_fallacy) and I repeat it below in short. My question is whether it is a fair example of sunk cost fallacy?

Consider person owns an object A, and then the person loses it. Then (quote from that link): “Assuming rational behavior, whether a person chooses to buy or not buy should be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object  makes the person less likely to buy another copy of , because the person does not want to admit that the initial purchase of  was wasteful”

I’m confused and not sure because this example is so much different from traditional examples when you keep spending money/effort/time because you already did it in the past. Could anyone clarify?

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I see two questions here. Are all fallacies that are based on sunk cost, sunk cost fallacies? Does the example above describe likely human behavior?

The earliest mentions of the sunk cost fallacy seem to come from the following paper.

Arkes, H. R., & Blumer, C. (1985), The psychology of sunk costs. Organizational Behavior and Human Decision Processes, 35, 124-140.

The definition given is as follows:

The sunk cost effect is a maladaptive economic behavior that is manifested in a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.

The loss of an object A is a sunk cost as whether or not you owned A in the past is not relevant to whether you should own it in the future. To be less likely (or more likely) to purchase the object A in the future is irrational behavior (a fallacy) related to sunk cost. However, it isn't clear whether it is a sunk cost fallacy based on the definition above. You could argue that you put effort into not owning the object (by losing it). And thus by continuing to put effort into not owning the object (by not purchasing it again) despite that not being the optimal decision, you are committing the sunk cost fallacy.

A clearer argument is that you put effort into owning the object (by purchasing it once), and thus you are more likely to continue to put effort into owning the object (by repurchasing it) based on the sunk cost fallacy. And this latter argument sounds more likely to me, but I have no evidence to back this up.

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Traditionally it is thought as: you have certain sunk costs, which lead you to believe that the best strategy is to keep spending, when the rational strategy is to not do so.

But it actually works both ways; that is: you have certain sunk costs, which lead you to believe that the best strategy is to not spend, when the rational strategy is to do so.

The point of the fallacy is that sunk costs influence you when they shouldn't; whether it's for spending more money/effort, or less, that's irrelevant.

In the given case, if you believed that a certain amount of your income was ideal to spend on good A, then, as long as you don't have A - and assuming your preferences nor your income, nor the prices change (ceteris paribus) - you should want good A; that would be economically rational. Yet, given this exact circumstance after losing A for the first time, you choose not to buy. Why does the irrationality happen? Because losing good A incurred a cost, a sunk cost, and that somehow influenced your decision; therefore, it is a sunk cost fallacy.

Which is again, the second definition in my answer: you have certain sunk costs (having lost good A), which lead you to believe that the best strategy is to not spend (don't buy A again), when the rational strategy is to do so (because the circumstances that lead you to buy A in the first place haven't changed).

Hope that helps!

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  • $\begingroup$ "given this exact circumstance after losing A" But didn't my income change? I did buy A. $\endgroup$ – Giskard Sep 30 at 5:17
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Failing to repurchase a lost item is not necessarily irrational; maybe some new information came to light that made the purchase seem less worthwhile. However, humans tend to behave irrationally when deciding whether to repurchase an item.

The following quote comes from Kahneman's book Thinking Fast and Slow.

Imagine you go see a movie which costs \$10 for a ticket. When you open your wallet or purse you realize you’ve lost a \$10 bill. Would you still buy a ticket? You probably would. Only 12 percent of subjects said they wouldn’t. Now, imagine you go to see the movie and pay \$10 for a ticket, but right before you hand it over to get inside you realize you’ve lost it. Would you go back and buy another ticket? Maybe, but it would hurt a lot more. In the experiment, 54 percent of people said they would not.

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