Why Do Consumers Struggle To Cut Their Losses?

Christopher Y. Olivola, Tepper School Associate Professor of Marketing, speaks about his research on how the principle known as the "sunk-cost" effect applies to consumer behavior.

Video Transcript

Within marketing, my specialty is consumer behavior — the psychology of judgment decision-making and the application of behavioral economics to marketing.

The name of my paper is "The Interpersonal Sunk-Cost Effect." It's been well-known for a while now in the literature that there's this classic bias called the sunk-cost effect. And this is a tendency of people to pursue or continue pursuing an option or a product where they've invested time and money into it, right? So if I spent a lot of money buying, let's say, a gym membership, I'm more likely to kind of force myself to go to the gym even if I don't want to or even if I'm feeling sick. And I was thinking maybe this effect extends beyond the self to another person. So what happens if someone else spent all that money and/or time to get me something? So if a good friend of mine bought the gym membership for me, would I also be more likely to force myself to go to the gym, compared to if, let's say, she got me the membership for free?

We don't like being seen as wasteful by others. We don't like wasting, and so on. People not only respond to their own past investments, their own sunk costs, but they're also motivated to honor the sunk costs that others have invested for them. If your friend or family member or someone else spent a lot more money to get you, let's say, the gym membership, you're also more likely to push yourself, despite the discomfort.

One of the surprising results in the study that even I didn't anticipate was that our response to other people's investments doesn't depend on our relationship with them. So in one condition it was a friend. Another condition it was, let's say, a colleague from work. And in a third condition, it was a total stranger — someone who you've just met for the first time at a party. In all three cases people respond more strongly when the other person invested more, regardless of your relationship to that person.

So you're basically driving yourself to be worse off in order to recuperate a cost, which you can't actually recuperate. It's sunk. You can never get it back. But we see the same phenomenon where it's someone else's investments as when it's own our past investment.