The sunk cost fallacy

rid your mind of sunk costsIt is great to be back at Artsjournal, after a fall semester of teaching a couple of courses, taking an introductory course in Mandarin, finishing up some academic papers and, most relevant to this space, completing a manuscript of a book on strategic pricing in the arts. I’ll give updates as that moves along. For now, I plan on getting back to regular posting, and I welcome suggestions for any questions on pricing in the arts that might occur to you.

To get started, I came across this article in the journal Psychological Science by Andrew C. Hafenbrack, Zoe Kinias, and Sigal Barsade (thanks to Freakonomics for the pointer) on experimental evidence indicating that meditation can help decision-makers better avoid the sunk cost fallacy. Sunk costs are any investments in a project that are unrecoverable whether the subject opts to continue ahead with the project or abandon it. At the moment a producer makes a decision whether to continue with, or quit, preparations for a performance, the costs that have been incurred to that moment in rehearsing the performance are sunk, and cannot be recovered – the hours and money spent are gone. As such, they are irrelevant to the continue-or-quit decision, which should be based upon estimates of remaining costs and potential revenues. For example, if to this point I have spent $100 on a project that is sunk, and new estimates suggest that the revenues I can gain from completing the project are $75, then I should continue with the project if remaining costs are less than $75, and quit if remaining costs are greater than $75. The $100 already spent is beside the point. If remaining costs are $85, I would quit. Quitting means I lose the $100 sunk cost, but continuing is even worse – I would lose the $100 and an additional $10 from spending $85 more dollars only to receive $75 in return.

The logic isn’t that hard to follow, but we are not always entirely logical in making decisions (and I include myself in that ‘we’!). Our investments in projects, and in relationships, weigh on us when we decide whether to continue. Academics and other writers persist with projects  – ‘because I have spent so much time on this to walk away from it’  – even when there is no good reason to believe that additional time invested will bring a return that makes it worthwhile. Nobody likes to feel like a ‘quitter'; we praise perseverance.

But good decisions come from being forward-looking. Will extending the run of this show bring more benefits than the additional performances will cost to stage? Costs of rehearsal, preparation, the initial marketing campaign, are all sunk, and not relevant to the decision. Should I keep or sell my old car? Relevant considerations are the expected net benefits to you of owning the car, with all its expected future maintenance needs, or selling at its current market value to purchase a new car, with all of its expected future maintenance needs. The money you have sunk into the car in the past in repairs is not relevant – that money is gone. Should I stay in this unsatisfying job (or other relationship)? Look forward: what does my career path look like if I stay, or if I go? Counting the years spent in the current job is a distraction from the decision to be made.

So when making decisions, clear your head of thoughts of past expenses and investments, and if meditation helps you do that …

 

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