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Imagine getting in your car with the intention of driving to the supermarket that is twenty minutes from where you live. Halfway there, you remember that it is not open on weekends, but instead of turning back you continue your journey \u2018just to make sure\u2019. After all, you\u2019ve already been driving for ten minutes so you might as well do another ten on the off chance that you were wrong and the supermarket is actually open on a Saturday.<\/p>\n
Known by the British saying of \u2018throwing good money after bad\u2019, this way of thinking is common and is an illogical cognitive pattern that is widespread, especially when it comes to gambling. It is the idea that you\u2019ve already paid something so you might as well keep going in the hope that you\u2019ll be able to recoup your initial investment. Logically you know you should stop, just as you know the supermarket is shut, but you keep going anyway.<\/p>\n
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In economic terms, a \u2018sunk cost\u2019 is a cost that has already been paid and therefore cannot be recovered. It is the opposite of a prospective cost, which is a cost in the future that can be avoided if you do something about it. Sunk costs are, in essence, prices that have already been paid that shouldn\u2019t have any bearing on our current decision making. The reality is, however, people often think about previous expenditures when making decisions.<\/p>\n
In theory, people should not allow sunk costs to play a part in their decision making about current options. Things that have already happened should be treated as water under the bridge, forgotten about and allowed to be consigned to the dustbin of history. In practice, though, people often find themselves \u2018crying over spilt milk\u2019 when trying to make a decision in the present moment, stopping them from being rational<\/a>.<\/p>\n People will often convince themselves that a previous expenditure means that further investments are justified. If an investment in time, effort or money has been made then many people are likely to continue on the same endeavour, even after it\u2019s become clear that it is a bad investment. This can be seen in countless different real-world situations, such as a bad relationship continuing because of the time already invested.<\/p>\n You can also see it in political decision making, such as politicians refusing to end a war because of the idea that the lives lost until that point would have \u2018been for nothing\u2019 if victory is not achieved. On a grand scale, the fallacy can be seen in play in the Concorde project between the British and French governments. Even once the supersonic jet had been proven to be a commercial disaster<\/a>, both governments continued to fund it.<\/p>\n The logical thing for the family to do would be to cut their losses and head home or elsewhere and try to get some enjoyment out of the remainder of the day. However, because so much money has been invested in getting to the theme park in the first place, most families will decide to stay at the theme park for the remainder of the day in order to try to \u2018get their money\u2019s worth\u2019.<\/p>\n This attitude results in the family suffering twice: once when the paid the money to get to the theme park in the first place and then again when they are actually at the theme park and stay there despite not enjoying themselves. It is better to suffer only once, given that the trip to the theme park has already been paid for and that expense cannot be recouped no matter what the family does in the theme park in the afternoon.<\/p>\n It is an entirely irrational way of thinking, but most people feel as though they don\u2019t want to \u2018waste\u2019 the money that they\u2019ve spent, in spite of the fact that they\u2019ve already spent it. The information regarding the money spent is irrelevant and not worth taking into account because it\u2019s already gone, yet the vast majority of people will always take it into account when trying to decide what to do next with their time, effort and money.<\/p>\n Understanding what the sunk cost fallacy is is one thing, but understanding how it relates to gambling is the key thing to get your head around. In the world of behavioural economics there are five main psychological factors that underpin the sunk cost fallacy, which are as follows:<\/p>\n These are all things that apply to gamblers who find themselves \u2018throwing good money after bad\u2019, so we\u2019ll look at them all a little bit more closely here.<\/p>\n People don\u2019t like \u2018wasting\u2019 their resources, which makes complete sense. The money spent up until the point that someone has to make a decision about what to do next should really be completely irrelevant to decision making, but in reality people don\u2019t want to feel as though they\u2019ve \u2018lost\u2019 their money on something and so try to add a sense of \u2018usefulness\u2019 to the situation at hand.<\/p>\n<\/div>\n This is a cognitive bias involving people deciding on the best option available to them according to whether the options available are presented with a positive or negative connotation. In other words, rather than seeing cutting their losses as a gain, people consider it be a further loss and don\u2019t like this perceived bias. As a result they take the \u2018positive\u2019 framing of trying to \u2018win\u2019 money<\/a> rather than the negative one of accepting a \u2018loss\u2019.<\/p>\n<\/div>\n Simply put, this is when someone makes an investment and that mentally increases the likelihood of them seeing a return on said investment<\/a>. This can be seen most clearly in people placing a bet and then convincing themselves that the bet that they\u2019ve placed is going to be a winner, as opposed to those just about to place a bet believing that it has a fair chance of winning.<\/p>\n<\/div>\n Bettors have a personal responsibility for the bets that they\u2019ve placed, which often increases the likelihood that they\u2019ll make another investment even if they first one went wrong. In a study<\/a> of business students, those that were told that a previous hypothetical investment that they\u2019d made had gone wrong went on to invest more money than those that were told that a previous manager had made a poor investment. In other words, the thinking was essentially \u2018it was my fault so I\u2019ve got to fix it\u2019.<\/p>\n<\/div>\n This is like the family that have gone to the amusement park and are not enjoying the day. They don\u2019t want to \u2018waste\u2019 their investment so they keep going rather than calling it quits. Equally, gamblers who have lost a bet don\u2019t want to \u2018waste\u2019 the money that they\u2019ve already invested so they keep gambling even when they know it\u2019s not the right thing to do or when it has become clear that they\u2019re losing money.<\/p>\n<\/div>\n Rather than cut his losses and walk away $3 worse off, he sank $300 trying to \u2018win his money back\u2019. He opted for a \u2018double or nothing\u2019 strategy and continually came up with nothing. He sank more and more money into the chase for an Xbox Kinect, eventually spending a reported $2,600, all of which he had to show for it at the end of his time at the carnival was a fluffy banana with Rastafarian hair.<\/p>\n Gribbohm\u2019s desire to not lose money is what resulted in him falling foul go the sunk cost fallacy, continually believing that he\u2019d be able to win his money back or, at the very least, walk away with an Xbox Kinect. For Xbox Kinect read any prize that you might wish to win at a casino or courtesy of a bookmaker. Most punters are just as liable to being averse to losses as Gribbohm and therefore losing more money than they need to.<\/p>\n It\u2019s important to think ahead, not in the past<\/a>. As Shankar Vedantam puts it<\/a>, making decisions from the position of someone that is loss averse is akin to trying to drive your car by always looking in the rearview mirror. You wouldn\u2019t drive your car by looking backwards so it\u2019s sensible to avoid doing so when making other decisions. The money that you\u2019ve lost is gone, you can\u2019t bet sensibly whilst thinking about trying to win it back.<\/p>\nSuffering More Than Once<\/h2>\n
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The reality of people continuing to invest money, time or effort into something even after it is no longer enjoyable is that they force themselves to suffer twice. Imagine a family that has paid to go a theme park for the day. Once they\u2019re there, it becomes abundantly clear that no one in the family is enjoying themselves and all are actually actively unhappy with what they\u2019ve chosen to do with their day. They are faced with two choices:<\/p>\n\n
How It Relates To Gambling<\/h2>\n
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\nLoss Aversion<\/h3>\n
\nFraming Effects<\/h3>\n
\nOveroptimistic Probability Bias<\/h3>\n
\nPersonal Responsibility<\/h3>\n
\nDesire Not To Be Wasteful<\/h3>\n
Loss Aversion Is The Chief Predecessor To The Sunk Cost Fallacy<\/h2>\n
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Meet Henry Gribbohm<\/a>, a 30-year-old resident of Epson, New Hampshire, attended a carnival and was presented with the opportunity to win an Xbox Kinect for the small price of just $3. All he needed to do was toss a ball into a tub and win a prize, though he didn\u2019t know what the prize was going to be each time he tossed the ball. Unfortunately for Gribbohm, the balls soon started bouncing out of the tub.<\/p>\nAvoiding The Sunk Cost Fallacy<\/h2>\n
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Now we know all about the sunk cost fallacy, it\u2019s important to try to figure out what we do to avoid falling into its trap. Loss aversion is a powerful thing<\/a> because it weighs losses more heavily than gains. One way to avoid allowing it to have power over your betting is by quantifying the real loss that you\u2019re suffering, rather than the imagined one. Is losing \u00a320 on a bad bet really all that bad in the grand scheme of things?<\/p>\n