The Sunk Cost Effect

Imagine that you have bought an expensive ticket to a concert. On the night of the show, there is a heavy snowstorm, and you no longer feel like going. Many people would go anyway, reasoning that they do not want to waste the money they have already spent. Economists call this the sunk cost effect: the tendency to continue an activity because of what has already been invested in it, rather than because of its future benefits.

From an economic point of view, this reasoning is a mistake. [A] The money spent on the ticket is gone whether or not you attend, so the only question that should matter is whether going to the concert will be more enjoyable than staying home. [B] In a well-known 1985 study, the psychologists Hal Arkes and Catherine Blumer demonstrated the effect with theater season tickets. [C] Customers who had been randomly given discounts attended fewer plays during the first half of the season than customers who had paid the full price. [D]

The sunk cost effect is not limited to individuals. Governments and businesses sometimes continue to fund large projects that are clearly failing, partly because so much money has already been spent on them. Some researchers suggest that the effect is linked to a strong desire to avoid appearing wasteful. Whatever its cause, recognizing the effect can help people make more rational decisions about whether to continue or to stop.