Last time I sunk my…

Recently my friend has told me that she had bought gym membership. I was quite surprised because she was the last person I would suspect of doing such a thing. She hated gym but loved aerobics. That's why I couldn't figure out what motivated her to join the gym instead of taking aerobics classes. What more surprising was, she bought it for 3 months. Finally, I asked her what was behind that? Maybe someone special? The answer was quite interesting. It was all about the price that, in here opinion, tended to become strong motivation for the gym. The gym...  that she hated even to think about.

https://www.pinterest.com/pin/304907837243396049/

That's the way my friend started her adventure with the gym. I realized that she became a slave to the sunk costs effect. This effect means that people have a tendency to continue an action that they invested in (e.g. money, time, effort). Although, it is an illogical decision(Arkes & Blumer, 1985).

Kahneman in his book Thinking fast and slow(2011) writes about “sunk cost fallacy”, which is further investment of our resources in a lost case, although there is another, better solution for us. According to the author, we do it because we don’t want to admit that we made a mistake. It is like this with my friend. When I realized she was dragging her feet I suggested Zumba classes to her or aerobics with music. She was excited about the idea, but she said she had already paid gym membership for three months, so she would have to sweat. However, actually she didn’t know how to work out effectively in the gym and because of that she was losing her athletic features and actually money as well.

http://www.rollingalpha.com/2014/03/06/the-problem-with-prepaid-tickets/

Coming back to the sunk costs effect a study from 2007(McAfee, Mialon, Mialon) shows that there are some exceptions to this rule. There are three situations when this theory becomes quite a rational move and people are ready to invest further

1. if they invested more in the past, it gives them a sense of being closer to their goal, and they don’t want to begin anything new from scratch,

2. if they wanted to recoup a previous loss,

3. if they wanted to show their commitment. It means that in some situations they risk losing their money to show someone their dedication is regardless of the cost. For instance, if they want to become a partner in a big company(2007).

What is a possible explanation for such the sunk costs effect? More often than not, there is the prospect theory mentioned by Kahneman and Tversky(1979), which explains that people tend to make decisions considering losses and gains, not a final effect and they are prone to doing this in an illogical way. To get to know more about this topic I recommend publications about heuristics which rule our decisions.

Coming back to my friend, I believe that her story will end without further losses. I hope she will survive and after three months of agony at the gym (how she describes it) and a bad mood which I sometimes experience on myself, she will start Zumba classes and have great fun exercising. This case is not such a big tragedy, however, Kahnmena(2011) highlights more serious cases, when people stuck in destructive situations, relationships and don’t want to change their situation only because of sunk costs.

Therefore,  the moral of this story is that sometimes loss can be the lesser of two evils instead of going around in circles. Students of economics and business courses take part in such training. Maybe you would like to join them?

References:
Arkes, H.R.,& Blumer, C. (1985). The Psychology of Sunk Cost. Organizational Behavior and Human Decision Processes, 35, 124-140.

Kahneman, D. (2011). Thinking, fast and slow (253; 343-346; 371). New York: Farrar, Straus and Giroux.

Mcafee, R.P., Mialon, H. M.,& Mialon, S.H. (2007). Do Sunk Costs Matter?. Economic Inquiry, 48, 323-336.