Carnegie Mellon University

shinking-ship

July 19, 2018

In for a Dime, in for a Dollar: Research Explains Why We Stick With Unwanted Choices – Even Those We Don’t Make

Noelle Wiker

PITTSBURGH – If you’ve ever worn an ugly sweater created by your beloved grandma, used a gift card to a seafood restaurant when you can’t stand fish or were roped into a trip pre-purchased by your parents, new research can explain why: you’re simply living out a time-tested phenomenon known as the sunk cost fallacy.

Long known to be a feature of human behavior, the sunk cost fallacy describes our inclination to stick with a purchase after we’ve lost interest to avoid feeling as though we’ve wasted our initial investment.

The phenomenon dates back decades; Richard Thaler, who won the Nobel Prize for Economics in 2017, was among the first to study it in depth, although it was described briefly in a classic economics textbook by Paul Samuelson and William Nordhaus, who advised readers to “let bygones be bygones” and ignore a prior investment, because the money is gone.

But new research by Christopher Olivola, assistant professor of marketing at the Tepper School of Business, explores a new twist on the sunk cost fallacy: he found that people will continue to stick with something they don’t like even when it’s the result of someone else’s investment.

Olivola’s research, published in Psychological Science, shows that the irrational effect of sunk costs is powerful regardless of the person’s relationship to the investor.

“It doesn’t have to be a close relationship,” Olivola explains. “If a person drives a long way to get a cake for a potluck dinner, people will eat it even when they don’t want it or feel full. Surprisingly, the effect of the sunk cost holds, even when you are honoring someone else’s investment. And the more he or she invested, the more stubborn and irrational the behavior is likely to become.”

The sunk cost effect explains why a city will continue building a bridge when its costs are way over budget partway through the project; if the city abandons the project, the costs already invested are perceived by the public to be wasted. Holding with Olivola’s findings, subsequent mayors will also be more likely to continue an expensive project started by their predecessors for fear of political backlash if they withdraw support.

According to Olivola, the sunk cost fallacy has also been shown to exist across cultural boundaries, making it a fundamentally human response.

“Whether it’s a long-term commitment such as a gym membership or something as simple as a movie ticket, the phenomenon holds,” he says. “From a practical standpoint, understanding what drives us as consumers is key to many business decisions.”