It’s easy to make up excuses for why it might still be rational to go to the movie. Here’s how to factor all that out and cut to the real issue:
Scenario 1: You bought a $10 non-refundable ticket to a show. (And note that you definitely would not have done so if the show cost $20.) As you get to the theater you realize you lost your ticket. Luckily, they have more available, still at $10. Do you buy another ticket?
Scenario 2: You didn’t buy a ticket ahead of time. As you get to the theater you realize that $10 has fallen out of your pocket and is lost. Luckily, you still have enough to buy a ticket. Do you do so?
Everyone agrees on Scenario 2. Of course you do. No one’s on such a tight budget that an unexpected change in wealth of $10 changes their utility for theater.
But many people refuse (I’ve checked) to see that Scenario 1 is fully equivalent. They can’t bear to pay another $10 for a show they already paid $10 for. If Scenarios 1 and 2 don’t feel fully equivalent, you’re probably suffering from the sunk cost fallacy!
He talks about how this is called by creating different mental accounts. However, Kahneman writes in “Thinking, Fast and Slow” that it is more rational to only have one mental account for all incomes and expenses. In this case people wouldn’t make the mistake of having savings in one account and credit card debt in the other.
If Scenarios 1 and 2 don’t feel fully equivalent, you’re probably suffering from the sunk cost fallacy!
There’s at least one other common reason why scenarios 1 and 2 may feel non-equivalent, besides the sunk costs fallacy: you may maintain different mental bank accounts for different goals, and so the $10 in scenarios 1 and 2 may be debited from different bank accounts.
For example, if you budget yourself $10/day for recreation, in scenario 1 you would have used up your recreational budget for the day, while in scenario 2 you would not.
Even if you do not maintain separate explicit budgets for e.g. fun vs. productivity vs. do-gooding, you may operate approximately, internally, by allowing each of your goals a certain approximate shares of time/money/etc., with which to optimize for what it wants. And so you might still have an intuitive feeling that you’d spent enough on recreation today in scenario 1, and not in scenario 2.
My non-confident guess is that it’s healthy to do have different implicit or explicit budgets for different goals.
I’m not sure if we’re saying the same thing but I think the reason they’re equivalent is just that the cost of the first ticket is sunk so in both cases you’re $10 poorer and are faced with the decision of whether to spend $10 on the show.
By the way, there are two ways to fall prey to the sunk cost fallacy: In the original post the problem is throwing good money (or effort/energy) after bad. In the lost ticket scenario the problem is refusing to throw good money after bad. In general, the problem is being influenced in either direction by money/effort that is spent and unrecoverable.
In examples like in the original post, I will ask myself “would I go to see this show (or whatever) right now if it were free?”. I’ve actually seen people hyper-correct for the sunk cost fallacy and ask themselves “do I still think this is worth $X?”. The point is to make your decision now as if the cost had never happened, hence “sunk cost”.
I’m not sure if we’re saying the same thing but I think the reason they’re equivalent is just that the cost of the first ticket is sunk so in both cases you’re $10 poorer and are faced with the decision of whether to spend $10 on the show.
Yeah, I think we are saying the same thing. History is irrelevant when determining the worth of a movie ticket. I just mentally represent it as a state diagram instead of worrying about whether the ticket lost was a sunk cost in order to avoid a fallacy.
By the way, there are two ways to fall prey to the sunk cost fallacy. [...] In examples like in the original post, I will ask myself “would I go to see this show (or whatever) right now if it were free?”.
Right, and I think your question is the valid point.
For what it is worth, the state diagram for the first example would shift the worth from the movie ticket to watching the movie itself:
Initial state: A ticket costs $10 and allows admission to a movie. If you predict watching the movie will be worth $10, buy the ticket.
Purchased state: The night of the movie, since you have a ticket, you can watch a movie without paying for a ticket. If it is worth watching the movie, use the ticket.
By the way, the reason I use state diagrams is because I arrive at the “purchased state” if someone else gives me a ticket. If someone gives me a ticket to a movie, am I obligated to use it? Ignoring any social concerns, the answer is no.
It’s easy to make up excuses for why it might still be rational to go to the movie. Here’s how to factor all that out and cut to the real issue:
Scenario 1: You bought a $10 non-refundable ticket to a show. (And note that you definitely would not have done so if the show cost $20.) As you get to the theater you realize you lost your ticket. Luckily, they have more available, still at $10. Do you buy another ticket?
Scenario 2: You didn’t buy a ticket ahead of time. As you get to the theater you realize that $10 has fallen out of your pocket and is lost. Luckily, you still have enough to buy a ticket. Do you do so?
Everyone agrees on Scenario 2. Of course you do. No one’s on such a tight budget that an unexpected change in wealth of $10 changes their utility for theater.
But many people refuse (I’ve checked) to see that Scenario 1 is fully equivalent. They can’t bear to pay another $10 for a show they already paid $10 for. If Scenarios 1 and 2 don’t feel fully equivalent, you’re probably suffering from the sunk cost fallacy!
Agreed! I only want to add the reference to Tversky and Kahneman’s original study which you are talking about: The Framing of Decisions and the Psychology of Choice. The 10$ experiment is on page 457.
He talks about how this is called by creating different mental accounts. However, Kahneman writes in “Thinking, Fast and Slow” that it is more rational to only have one mental account for all incomes and expenses. In this case people wouldn’t make the mistake of having savings in one account and credit card debt in the other.
I think I’ve managed to get into the mental state where I see the two as equivalent. (Or so I hope!)
There’s at least one other common reason why scenarios 1 and 2 may feel non-equivalent, besides the sunk costs fallacy: you may maintain different mental bank accounts for different goals, and so the $10 in scenarios 1 and 2 may be debited from different bank accounts.
For example, if you budget yourself $10/day for recreation, in scenario 1 you would have used up your recreational budget for the day, while in scenario 2 you would not.
Even if you do not maintain separate explicit budgets for e.g. fun vs. productivity vs. do-gooding, you may operate approximately, internally, by allowing each of your goals a certain approximate shares of time/money/etc., with which to optimize for what it wants. And so you might still have an intuitive feeling that you’d spent enough on recreation today in scenario 1, and not in scenario 2.
My non-confident guess is that it’s healthy to do have different implicit or explicit budgets for different goals.
The reason scenario 1 matches scenario 2 is because a ticket is worth $10 but extra tickets are worth nothing.
The state diagram:
Initial state: a ticket is worth $10 and you buy one
Purchased state: further tickets are now worth $0 but you lose yours
Lost state: now that you have no ticket, tickets are worth $10 again
The lost state and initial state are equivalent.
I’m not sure if we’re saying the same thing but I think the reason they’re equivalent is just that the cost of the first ticket is sunk so in both cases you’re $10 poorer and are faced with the decision of whether to spend $10 on the show.
By the way, there are two ways to fall prey to the sunk cost fallacy: In the original post the problem is throwing good money (or effort/energy) after bad. In the lost ticket scenario the problem is refusing to throw good money after bad. In general, the problem is being influenced in either direction by money/effort that is spent and unrecoverable.
In examples like in the original post, I will ask myself “would I go to see this show (or whatever) right now if it were free?”. I’ve actually seen people hyper-correct for the sunk cost fallacy and ask themselves “do I still think this is worth $X?”. The point is to make your decision now as if the cost had never happened, hence “sunk cost”.
Yeah, I think we are saying the same thing. History is irrelevant when determining the worth of a movie ticket. I just mentally represent it as a state diagram instead of worrying about whether the ticket lost was a sunk cost in order to avoid a fallacy.
Right, and I think your question is the valid point.
For what it is worth, the state diagram for the first example would shift the worth from the movie ticket to watching the movie itself:
Initial state: A ticket costs $10 and allows admission to a movie. If you predict watching the movie will be worth $10, buy the ticket.
Purchased state: The night of the movie, since you have a ticket, you can watch a movie without paying for a ticket. If it is worth watching the movie, use the ticket.
By the way, the reason I use state diagrams is because I arrive at the “purchased state” if someone else gives me a ticket. If someone gives me a ticket to a movie, am I obligated to use it? Ignoring any social concerns, the answer is no.