I recently got back from visiting family in South Carolina for thanksgiving. We had a nice time, ate a lot, and talked about the infamous Black Friday.
My cousin, my brother, and I decided to go look at some of the deals and see what we could potentially buy for cheaper than usual. We went to a Walmart, yet this instance was strange and unexpected.
There was hardly any signs for Black Friday and no giant banners of deals being slashed in half. I thought this could be because, as interesting as it is to see, Black Friday is becoming less popular because of companies like Amazon and online deliveries.
Although, I believe it’s also because people are finally noticing, they aren’t saving loads of money on Black Friday, they’re spending a ton.
Sunk Cost Fallacy
We all feel like we know economics.
Maybe not everything about it, but enough to where we can manage our money pretty wisely and budget ourselves out well.
We don’t like losing money on things that don’t require it. Yet we still save for times when purchasing useless but fun stuff and experiences feels necessary.
It becomes unfortunate when we aren’t saving as well as we had believed we were.
That’s where the sunk cost fallacy comes into play. It’s a bias we have to make us feel as if we rarely make wrong purchases.
We defend everything we buy because we believe we had reason to purchase, and most of the time, that reason is true. Although, the purchases we should regret, we don’t always. We see it a completely different way than it actually is.
We convince ourselves to look toward minimal loss or maximum profit when making purchases, and when it doesn’t go our way, we might plan around it.
The name sunk cost fallacy comes from sinking deeper and deeper trying to justify a purchase that may have cost you more than you anticipated. Investing in a purchase, you may go further and further down the rabbit hole making it that much harder to get out of.
It’s like choosing between paying the costs to attempt to repair an almost totaled car versus using the money to buy a new one. The justification in our minds clouds the reality of how our money should be used.
The more money we’ve sunk into something, the more we’re willing to spend to keep that thing going and with us.
There’s a lot of controversy over micro transactions in gaming right now, but this can apply their too. Even if a $5 game is better than a $20 or a $60 game, the one that cost you the most is probably what will take up most of your time and in part because you want it to.
We constantly want to feel like we made the right decision and didn’t drop our pockets out for wrong reasons. It’s inevitably, our egos trying to stop self criticism.
The Fallacy In Action
I learned about most of this fallacy googling it after seeing a post on Reddit mentioning the effect. I stumbled on a blog by David McRaney with a post about the sunk cost fallacy from 2011.
- For those interested in seeing the article.
But something he mentioned while talking about the fallacy really resonated with me and I hope it does with you.
It’s a way to really put into perspective how this brain bias can hit you without you ever knowing.
The premise goes like this:
Imagine you went to see a movie that costs $10 for a ticket. You leave your house knowing you have two $10 bills in your wallet. When you go to purchase the ticket, you notice one of the $10's is gone. You buy your ticket with the other $10 bill and go inside.
The second part turns it around and you can really see how your perspective of the situation changes without your knowing.
Imagine you went to see a movie that costs $10 for a ticket. You leave your house knowing you have two $10 bills in your wallet. When you purchase the ticket, you use one of the two $10 bills. You go inside to see the movie and you find your ticket is gone. How likely are you to go back and buy the ticket again?
Now obviously the example isn’t perfect considering there’s a few different ways to get inside having lost an already purchased ticket, but the theoretical example gives you some insight.
The scenario can show you how two situations, ending in exactly the same thing, can be harder to get to the same result and are not seen as the same level of disappointment.
The $10 had a purpose, and although one of the bills was gone in the first scenario, the second scenario had more purpose after it was spent. The $10 was exchanged for the ticket rendered useless once it was lost.
As consumers, we all try and defend our money and make sure we are not taken advantage of by businesses. We use logic when making our purchases and project how much we should be spending and how much we are willing to use.
We don’t like losing money, yet we have no hard time spending it. Remember that being aware of other ways the situation could end or has gone thus far, money’s purpose isn’t to have a purpose or else we end up getting defensive on our trade deals.