Everybody makes bad decisions, but how do we make amends? Turns out our instincts often guide us to follow bad decisions with worse decisions. In this episode, Mel and Dan explore the sunk cost fallacy, and how knowing when to cut your losses can be the smartest decision of all.
Mel: 00:18 Hi and welcome to Bad Decisions.
Dan: 00:20 The podcast that helps us understand why we choose what we choose.
Mel: 00:23 Why we think what we think.
Dan: 00:25 And how to exploit this stuff for fun and commercial gain.
Mel: 00:27 I'm Dr.Mel Weinberg. I'm a performance Psychologist.
Dan: 00:30 And I'm Dan Monheit. Co-founder of Hardhat, a creative agency built for today. Do it.
Dan: 00:41 So Mel, I was thinking right.
Mel: 00:43 Yeah.
Dan: 00:44 The way Ikea is set up is completely wrong.
Mel: 00:50 Okay. They seem to be pretty successful.
Dan: 00:50 Yeah, I know. But it's because they're not doing what I think they should do. They should literally just take my wallet when I get there.
Mel: 00:56 Okay.
Dan: 00:57 Because I think as anybody who has been to Ikea would know, that it is a forgone conclusion that once you are there, there is no way you are leaving without buying something.
Mel: 01:07 It's hard not to fall for that, isn't it.
Dan: 01:09 Yeah. Because, you know, they're usually like, not in the middle of the city. There's usually some sort of a drive to get out there and then you sort of circle the parking lot for a while and you park your car. That's not even really the start of it. 'Cause then you get in and instead of just giving you, like, a few simple aisles to walk down, they try and take you on this magical, fantastical journey, which requires a minimum, let’s be honest. A minimum of 45 minutes.
Mel: 01:33 Yeah. I mean, I've tried to do it faster and you end up just getting distracted by things you don't need.
Dan: 01:37 Yep.
Mel: 01:37 Kitchen appliances...
Dan: 01:38 Yeah. So you're gonna be in there 45, let's call it an hour, right. Plus the half hour to drive there, plus the half hour to park. You are in the haul for a minimum of 2 hours.
Mel: 01:46 Yeah.
Dan: 01:47 And there is just no way you are going to find yourself, at the end of that two hours, at the checkout saying “no nothing, nothing really for me this time. I'm just gonna leave.”
Mel: 01:58 What do you do instead?
Dan: 01:59 You buy something right.
Mel: 01:59 Just buy anything.
Dan: 02:01 You just like, I need some sort of a memento of my time, that Ikea and I spent together. I'm gonna go buy some more forks for the office. No office ever has enough forks. Maybe I'll just buy some cute kitchen gadgetry, that is probably never gonna get used, but at least I bought something right.
Mel: 02:19 It's like you made the bad decision to actually go to Ikea without first of all, checking online if they actually had what you were after.
Dan: 02:25 Yeah.
Mel: 02:25 Right.
Dan: 02:26 Don't rub it in.
Mel: 02:26 There's one bad decision. Then in order to try to mitigate that initial bad decision, you make another bad decision, which is to buy something that you really don't need.
Dan: 02:35 Yeah, 'cause I wasn't gonna let Ikea win. I was not gonna let them take two hours of my life and for me to just leave empty handed. I showed them. I bought something.
Mel: 02:35 You won.
Dan: 02:43 I won.
Mel: 02:43 Okay.
Dan: 02:44 I won. My extra forks are the trophy.
Mel: 02:50 What you're talking about Dan is another irrational decision that we make. Funny that.
Dan: 02:54 Yeah.
Mel: 02:55 How surprising that it would come in this, while we're sitting here recording. We're gonna talk about the sunk cost fallacy.
Dan: 03:03 Sunk cost.
Mel: 03:04 Yeah.
Dan: 03:04 Sign me up.
Mel: 03:05 We can talk about the psychology of sunk cost, which actually happened to be the title of a research paper.
Speaker 3: 03:17 Movie quote: “What do you want?”
Dan: 03:18 A research paper.
Mel: 03:19 Yeah.
Dan: 03:20 How surprising.
Mel: 03:21 By Arkes & Bloomer back in 1985. They're building off the work that Kahneman and Tversky did. What they were looking at was instances where people had already made an investment of either time, effort or money.
Dan: 03:34 Mm-hmm (affirmative).
Mel: 03:35 Like you did at Ikea. What their behaviour was like after that, once you've already made the investment. The idea is that we have this tendency to make further bad decisions once we've made an investment in something.
Dan: 03:48 Right. It's just like what we would casually refer to as throwing good money after bad.
Mel: 03:52 Yeah, exactly. The idea is, they did a bunch of experiments, and one of them was, and it's from the 1980's, so we're just gonna excuse the numbers and the places here because this was a 1985 US study.
Dan: 04:04 So you and three friends bought a hyper-coloured t-shirt and happy pants.
Mel: 04:10 Well actually, in this experiment, the idea is, the example is, okay. Imagine you've just spent a hundred dollars on a ticket for a weekend ski trip.
Dan: 04:10 Bargain.
Mel: 04:19 Decide to go to Michigan. Yeah a hundred bucks, weekend ski trip. I'd do it!
Dan: 04:22 For sure.
Mel: 04:23 A couple weeks later, you're thinking about planning another ski trip and you buy a fifty dollar ticket for a weekend ski trip to Wisconsin.
Dan: 04:29 Wisconsin.
Mel: 04:30 Yeah.
Dan: 04:30 Okay.
Mel: 04:31 And you really want to go to Wisconsin. Like, this fifty dollar ski trip to Wisconsin is gonna be the best ski trip you've ever had.
Dan: 04:36 Who doesn't love Wisconsin?
Mel: 04:37 Wisconsin's great.
Dan: 04:38 People haven't been there.
Mel: 04:39 Anyway. You then realise that you've actually double booked. You've actually booked the two weekends away for the same date and you can't change the date.
Dan: 04:49 Totally something I would do.
Mel: 04:52 Well, you've got a choice basically. You can't sell the tickets, okay, they're non-refundable.
Dan: 04:56 Yep.
Mel: 04:56 You can't exchange. You've gotta go on one trip or the other.
Dan: 04:58 Yep. So I paid fifty bucks for Wisconsin.
Mel: 05:00 Which you're gonna love.
Dan: 05:01 Yeah, and I paid a hundred bucks for?
Mel: 05:03 Michigan.
Dan: 05:03 Yep.
Mel: 05:04 You're faced with this decision. You've got two ski trips.
Dan: 05:07 Mm-hmm (affirmative).
Mel: 05:07 One of them, you really want to go on.
Dan: 05:09 Yep.
Mel: 05:10 The other, like, well you sort of want to go on.
Dan: 05:10 Yep.
Mel: 05:13 It costs a bit more.
Dan: 05:14 Yeah.
Mel: 05:14 Anyway, the cost is spent.
Dan: 05:14 Yeah.
Mel: 05:16 There's nothing you can do about it. You can't reclaim those costs. Either way, you're gonna miss out on something.
Dan: 05:20 Yep.
Mel: 05:20 The rational decision maker would think, well I really want to go to Wisconsin.
Dan: 05:23 Yeah. Sign me up.
Mel: 05:24 That's the one I'm gonna enjoy more. Off we go, pack the skis. Let’s go. Actually what happened, when the researchers asked people in this example, which ski trip will you go on, over 50 percent, said that they would choose to go on the 100 dollar ski trip to Michigan.
Dan: 05:24 Right.
Mel: 05:39 The one that they were gonna enjoy less.
Dan: 05:42 Right.
Mel: 05:42 Or not as much.
Dan: 05:43 Why?
Mel: 05:43 Instead of the 50 dollar ski trip to Wisconsin.
Dan: 05:46 Why?
Mel: 05:47 The idea is that we've already, we feel like we've already spent the money. We've already spent a 100 dollars on going to Michigan, so even if we're not gonna enjoy it as much, we should go because it would be wasteful not to.
Dan: 05:57 Right. Just like I showed Ikea who was boss.
Mel: 05:57 Exactly.
Dan: 06:00 They're gonna show Michigan “you took my 100 dollars, well I'm gonna turn up and enjoy you less than if I'd just gone to Wisconsin.”
Mel: 06:05 Sounding like a true winner there. Somebody's really happy with their victory.
Dan: 06:08 Yes. I guess we see this happen in lots and lots of places. That was a nice, cute 80's example. I mean this happened to me like, not even 12 months ago, where wifey, bless her, went and decided it would be a great thing for us to go and learn some wine appreciation. I'm pretty much a heathen when it comes to this stuff. We should go and do a wine appreciation course. Right. Now this thing was six nights.
Mel: 06:31 Why did you need to do a course? I mean, I appreciate wine.
Dan: 06:32 Yeah, talk to her about it. This was a six week course, one night a week.
Mel: 06:38 Okay.
Dan: 06:38 Yeah, it was like a Wednesday night.
Mel: 06:40 Mm-hmm (affirmative).
Dan: 06:42 I really didn't want to do this, but you know, sometimes you know marriage is about compromise. I decided I would go to this thing. I went to the first week and we have the parental advisory thing, yeah. It fucking sucked. This was terrible. Like 15 minutes into this two hour thing, I just wanted to get the hell out of there, after killing everybody in the room.
Mel: 06:59 Okay.
Dan: 07:00 I was like, you know what, it was just the first week, maybe it's gonna get better. So I went back the second week, and guess what happened the second week?
Mel: 07:05 You'd already paid for it, so you might as well go back the second week.
Dan: 07:07 Well this is what happened right. I went back the second week, I thought maybe I'm gonna get into it, I was just a bit rough. Second week sucked worse than the first week.
Mel: 07:07 Oh God.
Dan: 07:13 Right. I'm like, why on earth would I sign myself up to spend four more weeknights like this?
Mel: 07:20 But you went didn't you?
Dan: 07:20 But of course I ended up doing it because number one, I was already invested, I'd been to the first two weeks. And number two, like I guess I was kinda invested in the marriage. So, I needed to really see that through.
Mel: 07:31 Kind of.
Dan: 07:31 Yeah, it's probably not the best, you know, eight hours that I've ever spent in my life. But I for some strange reason, I felt completely obliged to do it.
Mel: 07:39 We do this in other situations where we feel like, we've already committed time, so we don't really want to be wasteful of that. An example might be from, if you're waiting on public transport, right. You're standing there, you're waiting for the bus.
Dan: 07:39 Mm-hmm (affirmative).
Mel: 07:52 The bus is supposed to come, but it's public transport, so it never comes when it's supposed to. You've been standing there for a good 15, 20 minutes waiting for this bus, have no idea really when it's coming. But you could call a cab or an Uber and you could get one in three minutes.
Dan: 08:09 Yeah.
Mel: 08:09 But most people will be like, oh but I've already spent 15, 20 minutes waiting for the bus, I'm gonna wait for this damn bus.
Dan: 08:15 Yeah. I think what we see, the theme with all this stuff is, there's no rewind button on life. Right. But we don't seem to be able to realise that when we're making decisions. We somehow let the sunk cost, the bits that we've already invested, shape what we do next.
Mel: 08:31 We've talked about a few heuristics over the previous episodes that come into play with this right. One of them is the idea of loss aversion.
Dan: 08:38 Yep.
Mel: 08:38 Right. Which as come up a few times, because it's a big heuristic. We're so against the idea of feeling like we've lost something, if it's time, if it's money, if it's effort, that we're highly motivated not to feel like we've lost something. Right. We're gonna wait for that bus because I don't want all that time to be lost, for nothing. I want that time to be for something.
Dan: 09:00 It's interesting that we feel such a strong fear of loss for things that have happened in our past. Like we’ve already invested that money, that it overrides the idea of losing things in the future, which we could still change.
Mel: 09:12 Right. We have a decision there to make. The cost is gone either way. We could choose to actually make the cost worse, by investing more like you said. Sort of putting good money after bad money. We can make that choice, which is a rational choice, we know what we should do, but so many of us, in all sorts of different situations are just gonna continue it. We see this happening with regards to time spent and then sort of wanting to pay money or pay more, or invest more time to make up for that bad time or bad money lost.
This also extends to more emotional decisions. For example, there are a lot of people that will stay in bad relationships or in bad jobs, just because they've invested a lot of time in it. They're like “this guys is an absolute asshole, but I've been with him for five years. This is five years of my life I'm not willing to give it up. I don't want that to be for nothing.” So you continue to stay in an unhealthy relationship because, well you've already been in it for so long, you may as well just continue.
Dan: 10:06 I'm feeling like we're starting to move into Dr.Phil territory here.
Mel: 10:10 Dr. Mel!
Dan: 10:12 You got to move on.
Mel: 10:14 People do the same thing with jobs. And even with careers. Like, people might be in a career that they don't like, but they feel like, oh my God. I spent four years at Uni getting this degree...
Dan: 10:22 Yeah.
Mel: 10:22 Now I have to do this job for the rest of my life.
Dan: 10:25 Yeah, and so absolutely, employees think about it when they're staying in a job. But also, I think from an employer perspective, you might have a staff member who it's just become really apparent to you that they're probably not right and they're probably not gonna be a person for the future of the team or the organisation. But oh God, like, they've been here for so long and we've spent all of this time together and they've seen things come and go. It just feels like it would be way too painful to send them on their way. So we end up ploughing another bad six months, year, two years, three years into this person, who really we didn't need to.
Mel: 11:00 You know, and we've talked about this in relation to time, in relation to emotions. I'm thinking as well of some examples in relation to food and sort of the retail industry. The idea of food, first of all, is like, you'll go to a restaurant and you'll look at the menu and with your hungry eyes, you'll order a whole bunch of stuff. So you've effectively paid for it.
Dan: 11:00 Yep.
Mel: 11:17 Right. Then you start eating, You feel like you've eaten enough. You feel pretty sick right now, but you're like “damn it, I paid for these 15 dumplings, I'm going to eat every last one of them!”
Dan: 11:30 Yeah, and you know this is also... I don't know if there's a migrant parent heuristic, but like, “you finish what's on your plate or you are not leaving the table!” Probably, that's got something to do with it as well.
Mel: 11:38 For sure.
Dan: 11:39 But you definitely see that come to the party, at things like buffets as well. Where you've got a bad buffet behaviour, where if you're at a buffet and you're trying to decide whether to go up for another round on the dessert bar. What you rationally should be thinking about is, well am I gonna feel better or worse after consuming the fourth round of dessert for this sitting? Actually what most people end up thinking about is the fact that they've already paid for the buffet. That is a sunk cost, so their only objective now is to get the absolute maximum they can out of the money they've spent.
Mel: 12:08 Optimising buffet performance.
Dan: 12:09 Yeah. Which I guess the, Pizza Hut works creators, probably should have spoke to us about. 'Cause there's really no way that was ever gonna work. $4.95, all you can eat, pizza, pasta, salad and dessert. You're just baiting people to put you out of business.
Mel: 12:25 If we know that people are vulnerable to making bad decisions like this and to wanting to continue to invest in something that they've already invested into. What do we do with it?
Dan: 12:34 Awesome. I thought you'd never ask. As businesses, this is like a really interesting one for us to explore. If we know that people feel committed to things that they've already started to invest in. One of the things we can do as businesses or as brands, is to try and get people to sink a little cost early on.
Mel: 12:52 Mm-hmm (affirmative).
Dan: 12:52 Right. This is where things like offering free trials or helping people import all of their contacts from an old system into a new system to get them going, can really start to pay dividends.
In a retail environment, a well trained retail person knows that when you approach a customer, the first question you should ask them, should not end with no. So Mel, if you're in the store and I walk up to you and I'm like “hey can I help you with something?”
Mel: 13:17 No.
Dan: 13:17 Yeah, right. So, that's terrible.
Mel: 13:17 Go away.
Dan: 13:19 You've just shut me off and now there's no investment. Right. But if I can go over and start engaging you, even just a smidgen, teeny bit, right.
Mel: 13:19 Mm-hmm (affirmative).
Dan: 13:27 And get some yes's early.
Mel: 13:28 What would you ask me?
Dan: 13:29 I'd say “hey Mel, are you finding everything you're looking for?”
Mel: 13:33 “Yes, thanks.”
Dan: 13:33 “Did you notice we've got some of the new season stuff up the front?”
Mel: 13:36 “Oh, new season.”
Dan: 13:37 “There's sale stuff up the back.”
Mel: 13:37 “Sales.”
Dan: 13:39 “Maybe I'll leave you to have a browse, then I'll come back and check in a few minutes.”
Mel: 13:42 “Sure, thanks.”
Dan: 13:42 Great. You've just started committing to me. Right. Just a little, teeny bit. Like we're not getting married anytime soon. But you have the start of a commitment and over the course of a conversation or a sales interaction, I can start building and building and before you know it, you're me, and I'm Ikea and you've just spent 45 minutes with me and there's no way you're gonna leave with nothing. In sales, this is what we call incremental buying, getting little yes's along the way and all of a sudden, the person you're selling to feels like they're in too deep and they'd be betraying themselves to back out.
Mel: 14:11 I feel like this reminds me of those annoying guys at shopping centres who try to sort of call you over to sell you some...
Dan: 14:16 Oh chuggers.
Mel: 14:17 Yeah, chuggers.
Dan: 14:18 Chuggers, they're like charity muggers.
Mel: 14:21 I like it. I like it.
Dan: 14:21 They basically mug you in plain sight. They mug you by trying to get you to donate to a charity for the rest of your life.
Mel: 14:25 Yeah, so they're just trying to entice you in a little bit, right.
Dan: 14:28 Yeah, so these guys don't stop you and say like “hey do you want to give 15 dollars a week for the rest of your life to some charity?” 'Cause obviously you're gonna say no. What they'll do is they'll try and get you to do anything. They'll just try and get you to stop. They'll ask you how your day is going. They'll do magic tricks. They'll ask you for the time. They'll do anything just to get you starting to sink a little bit of cost with them. Before you know it, you've signed yourself up to go on a Greenpeace boat and campaign against whaling in Japan or whatever it is they want you to do.
Mel: 14:54 Bloody chuggers.
Dan: 14:55 It happens. Chuggers, they ruin lives.
Mel: 14:59 I think the thing to remember, have we got anything else in terms of what we do, from sort of the brand perspective or from the sellers perspective?
Dan: 15:05 Well I mean, one of the things you might have realised as a retail consumer is this concept of you know, completing a look.
Mel: 15:11 Yeah, like if I've bought something, well I can't just have this pants without the top to go with it. Is that what you're talking about?
Dan: 15:16 Exactly. Once the retail person realises they've got you to commit to the pants.
Mel: 15:19 Yes.
Dan: 15:19 That's now sunk. They might as well try and leverage that into another sale with a, hey complete the look and get the top or the whatever else to go with it.
Mel: 15:26 Right. 'Cause I've already made the commitment to the entire look and if I just buy part of it, it's gonna feel incomplete.
Dan: 15:30 Exactly. You're gonna feel like you've wasted just buying the pants. You might as well buy the top as well.
Mel: 15:35 Very clever.
Dan: 15:35 Which extends us into the whole world of collectables and sets and there's a different one available each week. People make wildly irrational decisions to complete a set.
Mel: 15:44 Just to complete, just to feel that sense of closure right.
Dan: 15:45 Yeah, it's like, oh my God, if you had eight out of the nine possible happy meal toys that were available in that collection. How could you live with yourself?
Mel: 15:53 Yeah, you couldn't.
Dan: 15:53 No, you should drive across town and find the one that you don't have. Just so you can sleep at night.
Mel: 15:57 Make sure you complete the set.
Dan: 15:59 Yeah.
Mel: 16:00 From the consumer side of things, I think it's important to remember that you always have a choice. Right.
Dan: 16:05 Yeah.
Mel: 16:06 You do have a choice.
Dan: 16:06 You do.
Mel: 16:07 Your choice can either be rational or it can be emotional, right.
Dan: 16:07 Yeah.
Mel: 16:11 If you want to be a smart consumer, like we all sort of always say, don't, once we know that we have these tendencies to make irrational decisions, we can outsmart ourselves.
Dan: 16:20 Yeah. What you're saying is that you gotta be able to just flush your past. Just like reformat.
Mel: 16:25 We've gotta be able to accept that whatever it is we've invested, whether it's time, effort, money. It's gone and it's not coming back.
Dan: 16:32 Yeah.
Mel: 16:32 We can continue to chase after it and try and make it better, but we end up sort of like a bad gambling addict, where you just try to chase losses all the time.
Dan: 16:40 Yeah.
Mel: 16:41 Continuing to spiral into some serious, bad decision after bad decision after bad decision. As a consumer, you have a choice and you have a choice to be smarter than your brain.
Dan: 16:52 Yeah. I mean, one of the ways I've sort of found that I can hack myself into thinking about this stuff correctly...
Mel: 16:58 I like these self hacks.
Dan: 16:59 Yeah, yeah. Other than just having really no emotional connection to the things that have happened historically.
Mel: 17:02 You can do that too.
Dan: 17:02 I can maybe see you in your other professional capacity to talk about that.
Mel: 17:05 Okay, Mr.Robot.
Dan: 17:08 I think something that everybody would relate to is, starting a book and getting, I don't know, a quarter of the way in...
Mel: 17:15 There's so many unfinished books.
Dan: 17:16 And realising this book just sucks. I had this real problem, as far as problems, I mean this is not like a heroin problem. It's not such a bad problem but, I had this real problem that I would just persevere through books that I hated and it would be the same for movies, it would be the same for Netflix series. Because I started it and the idea of a book that I hadn't finished sitting on my shelf, I felt like a fraud or an imposter. You know.
Mel: 17:40 It was incomplete.
Dan: 17:40 It was incomplete.
Mel: 17:40 Yeah.
Dan: 17:41 I found a couple ways to get around this. Number one, Kindle changed my life because their unread books don't taunt me anymore, because I can't see them.
Mel: 17:48 It's such a difference.
Dan: 17:49 That's one. The other thing is I realised that, I'm a pretty slow reader right. I've got young kids, I've got a pretty busy life. Optimistically, to be honest, very optimistically, I could maybe read one book a month.
Mel: 18:02 Okay.
Dan: 18:02 Right. I can read, let’s just make this easy, I can read ten books a year.
Mel: 18:06 Okay.
Dan: 18:07 And I've probably got realistically, I don't know, 50 years left.
Mel: 18:11 I'll give ya 50 years.
Dan: 18:11 50 years left.
Mel: 18:13 50 years with good vision, enough to read.
Dan: 18:15 Yeah. I'm gonna be able to read 500, you know what, lets round me up. Let's say I'm gonna have a bit more free time when I'm older. Maybe I'm gonna be able to read 700 books.
Mel: 18:23 So optimistic. 700 books.
Dan: 18:24 700 books is the total number of books I will be able to read for the rest of my life.
Mel: 18:29 You better choose carefully.
Dan: 18:31 There are like a billion books out there.
Mel: 18:31 Yeah.
Dan: 18:33 Right? So if I'm 20 pages into a book that sucks, and I'm pretty sure this is not gonna be in the top 700 books I'm ever gonna read in my life, turf it, move on. I guess my mental hack is I've realised that FOMO, and like reminding myself that there's other things out there, other ways I could spend the next ten minutes or the next hour or the next year of my life, seems to overcome or outweigh the desire to want to make good on a bad investment.
Mel: 19:01 Okay. For more of Dan's self hacks against cognitive biases or if you have any hacks that you use to overcome these biases. We'd love to hear about them. Please find us on social media. My Twitter handle is @DrMelW.
Dan: 19:16 Just Twitter for you this week?
Mel: 19:18 I mean, whatever social media, find me. Just Google Melissa Weinberg.
Dan: 19:21 Yeah. Dr. Melissa Weinberg.
Mel: 19:21 Of course.
Dan: 19:23 Yeah and I'm @DanMonheit, no Doctor. Still waiting on that honorary Doctor to come through. If you or anybody you know is able to give them out, you know where to find me.
Mel: 19:32 Professor Dan.
Dan: 19:33 That's right.
Alright. Is that it?
Mel: 19:33 I think that's all.
Dan: 19:37 You know, I feel like we've come this far, maybe we should just do a little bit more.
Mel: 19:39 You know I feel like that people have already been listening to us for the last sort of, 15 minutes, they're just gonna keep listening to the rest anyway.
Dan: 19:45 You know, actually, honestly really and truly, one thing we didn't talk about at all in this episode, which maybe if you got thoughts, let us know, is how people stay in really bad financial investments, holding onto stocks and things for way too long. Anyway, that's a whole separate show. We'll do something about money later. Yes?
Mel: 19:58 Sure.
Dan: 19:59 Cool. Alright.
Mel: 20:00 Sounds good.
Dan: 20:00 Don't forget to tune in next time for more bad decisions.
Mel: 20:03 Plenty more bad decisions.
Dan: 20:05 Peace out everybody.