Young People Fall for the Sunk Cost Fallacy More Often than Older Adults

I used to play a game with a friend in college where we took turns flipping a coin. Every time the coin landed heads up, my friend had to buy the next round of beer. Every time the coin landed tails up, I would have to buy the round. In the long run, the coin would land heads up about as often as it landed tails up. In the short run of a single Friday night, however, it was entirely possible that the coin would land heads up or tails up three or four times in a row, meaning one of us would end up paying most of the bar tab that evening.

Now, my buddy had a goofy theory about this. He claimed that if the coin landed heads up several times in a row, that would make it more likely for the coin to land tails up on the next throws, in order to "even things out." I argued that each new toss had an equally likely chance of landing heads or tails, irrespective of the history of the coin's tosses. "The coin doesn't have a memory," I argued. "If this coin were to land tails up five times in a row, could I save it and wait until next Friday night, confident that it would be more likely to land heads up because of its need to 'even things out?'"

"Yes!" was his emphatic answer.

I didn't know the term at the time, but my friend was a victim of the "sunk cost fallacy," the tendency to continue to invest time or money in an endeavor just because you've already invested time or money into it. Individuals, and even corporations and governments, fall for the sunk cost fallacy all the time. (UPDATE: In the comments, David Rosen pointed out that this is not an example of the "sunk cost" fallacy, but of the "Monte Carlo fallacy.") They invest money in a poorly performing stock just because they've already lost a lot of money buying shares of it in the past. They keep building expensive jets that lose money just because they sunk a fortune into tooling and manufacturing it. They keep sending soldiers to die in a war they are losing just because they've sent many soldiers to their deaths before them.

Can we avoid the sunk cost trap? Yes, say researchers at West Virginia University. You can avoid it by getting older. Psychologists JoNell Strough, Clare Mehta, Joseph McFall, and Kelly Schuller, whose paper appears the July 2008 issue of Psychological Science, found that young adults who pay $10.95 to watch a movie that seems "pretty bad" after the first five minutes are more likely to continue watching the movie than older adults are. The young people tried to recoup their investment by suffering through a lousy movie in the hope that it would get better, while the older adults decided to cut their losses and move on.

I haven't seen my college buddy since we graduated, but I wonder if the passing of time has made him rethink his position on magical memory coins.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Comments

[David Rosen]

Your friend is not a victim of the sunk cost fallacy --he is the victim of the Monte Carlo fallacy. This is specifically the belief that the probability of independent events goes up just because the event didn't happen recently (or vice-versa). The sunk cost fallacy is independent of this fallacy. An example of sunk cost fallacy is where you sit through the entire movie just because you already paid for it. This may have nothing to do with the probability of anything.

The fact is that the random events are not "made up for" at all. The "law of averages" only works because those initial events become a smaller and smaller proportion of all the trials as you have more and more trials.

[Mark Frauenfelder]

Thanks for correcting, me, David. I appreciate the information.

[MaxGXL]

I have a similar story to tell. A group of friends and I are travelling to Bali next week. Now, there was recently a serious bombing in Jakarta and a lot of Aussies are cancelling their holidays to Bali out of fear of terror attacks.

I on the other hand believe that this is the best time to go because there has already been a bombing in Indonesia and therefore now their is such a little chance of it happenning again so soon.

What do you think?