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Sunk cost fallacy fallacy fallacy fallacy [Nov. 10th, 2012|11:11 am]
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Epistemic status: First argument is boring, really like the second, third might just be me making excuses

The sunk cost fallacy has always seriously bothered me.

For example, in her Checklist of Rationality Habits, Anna Salamon writes:
When facing a difficult decision, I check which considerations are consequentialist - which considerations are actually about future consequences. (Recent example from Eliezer: I bought a $1400 mattress in my quest for sleep, over the Internet hence much cheaper than the mattress I tried in the store, but non-returnable. When the new mattress didn't seem to work too well once I actually tried sleeping nights on it, this was making me reluctant to spend even more money trying another mattress. I reminded myself that the $1400 was a sunk cost rather than a future consequence, and didn't change the importance and scope of future better sleep at stake (occurring once per day and a large effect size each day).

This makes logical sense, but if I were the one who had bought the mattress, and Anna Salamon was in the same room as me trying to convince me to buy a new one on these grounds, I would start freaking out and gibbering (actually, this describes my interactions with Anna so far pretty well). This is despite usually being pretty good at internalizing this kind of reasoning, so I started wondering whether there was something flawed about this particular line of thinking.

The first obvious flaw, one that everyone always brings up, is that it only works if you have so much spending money that the loss of $1400 doesn't make a big difference to your overall financial situation either way. That is, if you start with $2800 in savings, you might be willing to spend $1400 on a mattress, but after you've bought one mattress and it's not very good, you only have $1400 left, and you might want to keep that money so that you have some savings left for staples and emergencies and so on. This is a good argument, but it doesn't apply to things that cost much less, and I have the same instinctive reaction to those too.

So here's a second argument I've never heard before: buying one mattress and hating it provides important information both on average mattress quality and on your ability to choose good mattresses. When you bought your first mattress, you might have naively thought a mattress was a mattress and couldn't possibly fail at mattressing. Or you might have thought that you know what you want and you're smart enough to choose the best mattress in the catalog. Now you have a data point showing that's not so. Apparently choosing the right mattress is pretty hard, and whatever your previous mattress-choosing criteria were aren't good enough.

So you realize that you're not just purchasing a new mattress for $1400. You're purchasing an X% chance at having a new mattress, and a (1-X)% chance of getting it, realizing it's useless, and throwing it away. You started off believing X was nearly 100%. Now you know better. Maybe now you think X is more like 50%. That means in order to purchase the second $1400 mattress, you would have to value a good mattress at $2800, not $1400. This means it may be rational not to get the second mattress.

And here's a third argument, that probably says more about my own thought processes than it says about rationality: not buying the second mattress is a way of punishing yourself for screwing up the first one.

I am both lazy and cursed with a strong tendency to self-punish, but these two flaws cancel each other out to a degree. If I knew that every time I bought a bad product, I would just shrug and spend even more money to buy a second version and see if that one worked, then that confidence would make me careless when ordering something: shopping is no fun and if I buy the first thing I see I can move on to something more interesting. But when I know that I'm sticking with what I get, I am more careful; probably right around the right amount of careful.

This might be a just-so story explaining something that really comes from my desire to signal to my parents and my friends that I am financially responsible and not the sort of person who will throw away $1400 on a mattress, then decide I don't like it, then throw away another $1400 on another mattress. But I think it also has some truth to it.
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Comments:
[User Picture]From: gwern branwen
2012-11-10 08:20 pm (UTC)

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> So here's a second argument I've never heard before: buying one mattress and hating it provides important information both on average mattress quality and on your ability to choose good mattresses. When you bought your first mattress, you might have naively thought a mattress was a mattress and couldn't possibly fail at mattressing. Or you might have thought that you know what you want and you're smart enough to choose the best mattress in the catalog. Now you have a data point showing that's not so. Apparently choosing the right mattress is pretty hard, and whatever your previous mattress-choosing criteria were aren't good enough.

Well, I don't use a mattress example or anything, but the learning argument *is* core to my http://www.gwern.net/Sunk%20cost article (which is among my least-appreciated writings, oddly enough, given interest in sunk costs among LWers).
[User Picture]From: squid314
2012-11-11 07:59 pm (UTC)

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Ah, I'm sorry. I hadn't seen that before.
[User Picture]From: nancylebov
2012-11-12 03:35 pm (UTC)

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People have made an effort to understand sunk cost and now they don't want to abandon the idea?

Seriously, I suspect that a lot of complaints about people committing sunk cost fallacies underestimate the cost of transition.

The idea that sunk cost isn't found in young children connects with the bit in Deep Survival that children under six are more likely to survive if lost in the wilderness than adults are. The reasons offered were that they're less likely to stick with a bad plan, and they're better at taking short-term care of themselves-- resting and staying warm.
[User Picture]From: gwern branwen
2012-11-16 01:53 am (UTC)

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> People have made an effort to understand sunk cost and now they don't want to abandon the idea?

That would be pretty ironic, wouldn't it?

The _Deep Survival_ analogy is interesting, but it's such an extreme situation that non-sunk-costing may not be the explanation: it may be that small children haven't learned to stick to a plan and the adults don't get clear feedback that their plan is a Bad Idea, or that small children know plans are good but are too impulsive to stick to them (which is bad in normal environments where the adults are right GET OUT OF THAT DON'T EAT THAT but in this particular environment, being lost in wildernesses, happens to be useful), etc. Not sure how one could ethically test the possibilities, either...
[User Picture]From: sunch
2012-11-10 09:10 pm (UTC)

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Imagine you buy a non-returnable $1400 mattress and feel bad about it; on day 3 one of the following happens:
a) you sell it at a loss/throw it away and buy a different one, or
b) it gets completely destroyed at no fault of yours and you buy a different one

Intuitively, buying the new one in case b) wouldn't feel half as bad as in case a), though in both cases your mattress-choosing skills didn't change one bit. It can be argued that until one consciously gets rid of the mattress at a loss, the perception of oneself as a waster of subjectively valuable resources does not quite settle in the mind, leaving some room for doubt. Being a bad mattress-chooser plays a role in percepting oneself as a resource-waster, but it doesn't tell the whole story.
[User Picture]From: Tim McGowan
2012-11-10 09:52 pm (UTC)

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The little vignette doesn't give you all the details, but it does give at least one super important one: the $1400 spent on the last mattress improved utility by 0. So the need for a mattress is exactly the same as it was before.

Consider another example: You just bought a shiny new car, then gas goes up by $4 a gallon. Now public transportation is cheaper. The car hasn't actually gotten you anywhere; you need gas for that, so after buying the car your need for transportation hasn't been satisfied. You'd be nuts to spend more money on gas just because you now have the car.

The failure mode is trying to force utility out of a past decision where there is none. In doing so, you sacrifice all the utility you could have gotten by using the money/time/whatever you're expending on the sunk cost on something else.

I think the example makes it pretty clear that not getting a good night's sleep is a big deal for the author, and forcing himself through sleepless nights to attempt getting utility out of a crappy mattress is more costly than a new mattress. But, yes, it's not as if the numbers of utils and new budget constraints are all layed out there. A textbook example of the sunk cost fallacy would have to lay out utility subject to the new, post-sunk-cost budget constraints.
[User Picture]From: marycatelli
2012-11-11 02:13 am (UTC)

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Does it? She actually slept several nights on it. That's higher than 0.
[User Picture]From: naath
2012-11-12 11:12 am (UTC)

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The $1400 spent on the useless mattress increased the subjective value I place on money because I now have less of it (assuming I do not have so much money that it's an inconsequential sum to me). So whilst I may have previously thought that the $1400 I had and wasn't using was worth it for a good mattress I may now think that borrowing $1400 on a high-interest credit card is NOT worth it for a good mattress (also I may now think that to get an actually GOOD mattress I would have to spend more - for instance going to a physical store where I could try mattresses out).

But yes, it's different to the case of, for instance, continuing to buy petrol because "I have a car" rather than buying bus tickets which would get me to the same place faster.
[User Picture]From: st_rev
2012-11-10 11:37 pm (UTC)

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Shorter version of your second argument: The experience of making the purchase updates your priors about the purchase. Microecon/finance 101 arguments implicitly bake in a lot of certainty/equilibrium assumptions that don't necessarily apply in real decision contexts.

Having said that, I'm not sure this is really an example of the sunk cost fallacy! A better example might be renting the mattress, discovering that it was useless, and continuing to pay for it because you don't want to waste the down payment.


HAHAHAHAHAHA DOWN PAYMENT GET IT DOWN PAYMENT AAAAAAaaaa wow

Edited at 2012-11-10 11:42 pm (UTC)
[User Picture]From: squid314
2012-11-11 08:00 pm (UTC)

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ಠ_ಠ
[User Picture]From: st_rev
2012-11-11 09:33 pm (UTC)

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XD
[User Picture]From: cakoluchiam
2012-11-11 08:57 am (UTC)

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I'm not sure how to put this in rationality terms, but what about renting a $2800 mattress while you save up the money to gamble on another $1400 mattress?

I try not to think of my investments in terms of one-time investments, but instead everything in terms of time-use. For example, while I "value" a pair of headphones at $5 in the sense that if my headphones break while I'm at work I'll happily walk down to the convenience store to get a new pair of headphones at $5, and when the $5 headphones break six months later, I feel like I got my money's worth. But given the additional value of not having to go half a day without music and then buying a new set of headphones every 6 months, I'll happily pay the $50 for a much better set of headphones that I expect to be able to use for the next few years.

In your example's case, the individual in question may value a good mattress (which should last maybe 10 years) at $1400, but really we're talking about $140/year, or about $12/month. When you look at the $1400 mattress that clearly doesn't solve the problem, there are a few alternatives that don't trigger the sunk cost fallacy, but also don't require spending another $1400 right now. In addition to the option of renting a more reliably good mattress (which probably would cost a lot more than $12/month), zey could maybe invest $140 in a mattress pad and comforter set that would last at least a year, or in sleep-aids which accomplish a similar effect.

(Also, return-policy or none, there's always Craigslist)
[User Picture]From: cakoluchiam
2012-11-11 09:04 am (UTC)

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After reading the other comments, I've figured out how to put it into rationality terms, or rather st_rev has figured it out for me in his second paragraph above.

i.e. Eliezer's example was a bad example of the sunk cost fallacy. It's not the reluctance to spend more money on a new mattress that exemplifies the fallacy, but rather the decision to keep the new mattress at all rather than throwing it out and continuing to sleep wherever you were before that was working better for you.

Deciding not to purchase something because you've spent $1400 on it and didn't receive $1400 of your subjective value out of it isn't the sunk cost fallacy. In fact, just the opposite—buying another $1400 mattress would be an example of the fallacy of insanity, that is, doing the same thing over again and expecting different results. The good sleep you value at $1400 isn't the same quality of sleep the manufacturers of that mattress value at $1400. It's like saying "I value a 2-lb bag of M&Ms at $1", then going out and buying $1 worth of M&Ms, realizing you only got 5 oz, and then deciding to go spend another dollar on M&Ms in the hope of getting 2# this time.

Edited at 2012-11-11 09:19 am (UTC)
[User Picture]From: nancylebov
2012-11-12 03:30 pm (UTC)

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This may not address the sunk cost issue, but if I bought a $1400 mattress and found I didn't like it, I'd think I learned something about mattresses beyond not trusting them.

I might decide I don't ever want that sort of mattress, or that I don't want that manufacturer's mattresses, or that I need to research them more carefully, or that I will never buy an expensive mattress that I can't return.

So I decided to find out something about return policies for mattresses, and found what looks like a promising sleep products review site.

Your last paragraph left me wondering about the value of privacy. If concerns about what people might think of you would lead to a bad choice of keeping an unsatisfactory mattress, then you could just not tell them if you threw it out.
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