Sunk Cost

Like the image below, you may have been in a situation where even though it would not be optimal to continue doing something, you are compelled to continue by the fact that you have already committed resources towards this activity. These previously committed resources are known as sunk costs.

When sunk costs are involved in decision-making, one can observe another instance of loss avoidance. Questions 4 and 5 are examples of this.

Question 4

You are attracted by an ad for a reduced-rate weekend holiday at a nearby resort, and you send them a $200 non-refundable deposit. The weekend has arrived, and you and a companion have driven halfway to the resort. Unfortunately, both you and your companion realise that you are coming down with the flu because you are achy and fatigued, and your assessment of the situation is that you would have a less pleasant weekend at the resort than at home. Keeping in mind that you’ve already sent the deposit, which you can’t get back, and you’re already halfway to the resort, would you keep going?

Question

This question was the same for both versions of the questionnaire. What did you decide to do in this hypothetical situation? How do you think most people responded? Let’s have a look at the proportion of “yes” and “no” responses from PSYC2071 students:

Many people would drive on in order to avoid wasting the $200 deposit. However, this makes little sense. They have already spent the $200, whether they go to the resort or whether they go home. No matter what they do, they won’t get their $200 back. Therefore, continuing to drive toward the resort won’t “redeem” their $200 and when they get there, they will have to pay the rest of the amount too (assuming that the deposit is not the full amount). Also, driving on is the same distance as driving home, and if they do go on, they will later have to drive all the way home anyway. Thus, in deciding to drive on, they are being influenced by a sunk cost. A cost that, in this case, leads them to spend the weekend at a place they would rather not be (and have to pay for it).

Question 5

You are 2/3 of the way through your three-year undergraduate degree when you decide that you hate it and want to undertake study in a completely different field. Which option would you take knowing that your current degree is completely irrelevant to the new one?

Question

What about your choice for question 5? Do you think most people gave the same answer? Let’s look at some data from other students:

The logic here is similar to Question 4, albeit with a greater sunk cost as well as a greater additional cost (i.e., of paying for and spending time completing the rest of the hated course).

Brainstorm

Are there any differences in the proportion of “yes” and “no” responses between this question and Question 4? What are the arguments for expecting such a difference (or not)?