I ♥ the Sunk Cost Fallacy


The above picture was taken almost exactly 61 years ago in front of Hungary’s parliament building during the brief revolution against Communist rule. I don’t know who the people in the picture raising the old Hungarian flag atop a captured tank were, but I know for sure that my parents (who both lived in Budapest but hadn’t met yet) aren’t lurking somewhere in the background.

My mom, who had just turned 16, was staying far, far away from the  fighting. My dad, who was 26 and a recent medical school graduate, was in the process of getting far, far away from Hungary period, along with 200,000 of his countrymen – about 2% of the population. Just days after this photo was taken, 2,000 Soviet tanks rolled in to Budapest to crush the uprising. During the ensuing chaos, with the border guards having abandoned their posts, my dad joined 180,000 people who walked across the Austrian border (some others went south to Yugoslavia while heading north to north or southeast to Soviet controlled Czechoslovakia or Romania, respectively, much less east to the Soviet Union itself, weren’t viable options).

My dad told me that, as he hitchhiked and walked for two days to Vienna with the occasional sounds of gunfire in the distance, he knew that there was no going back. He also decided that he was a European and that he would try to seek asylum somewhere in Europe and not the U.S. or far-off Australia. As he got to Vienna, there were tens of thousands of hungry and confused refugees milling about. He saw a bunch of Hungarians standing in a long line and figured that there must be something good being handed out at the end of it. After waiting for a long time, he finally asked someone. He was standing in front of the U.S. embassy. After spending all that time in line, he decided to stay and go live in America.

My dad (thank goodness!) had just succumbed to a common but flawed way of thinking. He had decided at the outset that he wouldn’t go to America and, while the U.S. was very generous, taking in nearly 40,000 Hungarians, he still could have migrated somewhere else. Austria? Sweden? France? You’d be reading a blog by Johann, Sven, or Francois.

But, by “investing” time in the U.S. line, he felt a compulsion to stay, which is about as rational as buying a movie ticket and going to see the show despite later catching pneumonia and hearing from a friend that it’s awful. This sunk cost fallacy is best known as an investing blunder. You go out and buy a share of XYZ Corp at $100 a share and it subsequently falls to $90. Let’s say some new information comes out that makes you re-think the wisdom of investing in the stock at even this lower price. Many people will keep their investment in this case because of their fixation with their $100 investment rather than asking whether it is even worth $90, which is the “correct” way to view the problem.

Clearly the apple doesn’t fall far from the tree when it comes to cognitive biases as I personally am in the middle of a giant sunk cost blunder myself, despite writing a book about why people are bad investors. Having invested $100 in an Unlimited PastaPass from Olive Garden (long story – faithful readers may be hearing more about this soon), I’ve been making fairly full use of it, eating at the chain about once a day.

But I don’t have to eat pasta, and in many cases I went there when I really didn’t feel like eating at America’s favorite faux-Tuscan chain. Since I already had paid for it, though, I keep thinking it would be silly not to make use of it. This even has been the case when I could have eaten perfectly tasty leftovers for free or just skipped lunch, as I often do.

Anyway, I owe my existence, empty calories and all, to the sunk cost fallacy, so it isn’t all bad.






About SJ

I rite good.
This entry was posted in Economics, Finance, Hungary and tagged , , , , , . Bookmark the permalink.

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