Thinking and Deciding

MENTAL ACCOUNTING 305
The extra-cost effect
Integration and segregation can be manipulated, as in the extra cost effect (Tversky
and Kahneman, 1981). “Imagine that you have decided to see a play where admission
is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill.
Would you still pay $10 for a ticket for the play?” Most subjects asked this question
said that they would. “Imagine that you have decided to see a play and paid the
admission price of $10 per ticket. As you enter the theater you discover that you
have lost the ticket. The seat was not marked and the ticket cannot be recovered.”
In this case, most would not spend $10 on another ticket. Apparently, these subjects
think of the cost of the ticket as $20. Larrick, Morgan, and Nisbett (1990) succeeded
in convincing most subjects that this was an error and that decisions should be made
on the basis of future consequences only. The choice in both cases is whether to
spend $10 for a ticket, given one’s current wealth, which is already $10 less than it
was thought to be.
The extra-cost effect could result from a heuristic in which people compare value
with total cost. Total cost is typically the same as marginal cost (that is, extra cost,
the extra cost of a new ticket). But the correlation is broken here, so the heuristic
fails.
The sunk-cost effect
Sometimes people act as though the very commitment they have made requires them
to keep going. This is like “throwing good money after bad.” Another name for it
is the sunk-cost effect: Once funds have been “sunk” into a plan, the only way not
to waste them, it seems, is to sink still more. We see this sort of rationale operating
in public policy making as well as in our personal lives. It figured, many now think,
in such possible misadventures as the Vietnam War and the Tennessee-Tombigbee
Waterway project. A senator expressed sunk-cost thinking when he said, about the
latter project, “To terminate a project in which $1.1 billion has been invested represents
an unconscionable mishandling of taxpayers’ dollars” (Senator Jeremiah Denton,
November, 1981, quoted by Arkes and Blumer, 1985).
Such a position is irrational; it subverts one’s own (or society’s) goals. Once you
have determined that the best course of action for the future is to change plans —
having weighed the effect on others and all of the relevant factors — the time, effort,
and money you have spent in the past does not matter one bit. Sticking to a futile
plan will not make your earlier decision the right one, if it was really wrong. When
we concern ourselves with sunk costs, we are basing a decision on the past, not on
its consequences.
This effect was demonstrated experimentally by Arkes and Blumer (1985). If you
had been a subject in one experiment of theirs (p. 126), you would have been told to
imagine that you had paid $100 for a ski trip to Michigan and $50 for another ski trip
to Wisconsin. Money considerations aside, you would prefer the trip to Wisconsin.
If you then discover that the trips are on the same weekend and that you cannot sell