Thinking and Deciding

MENTAL ACCOUNTING 307
Mr. Munn and Mr. Fry each live in an apartment near the local movie
theater. Mr. Munn can go to the movies only on Monday night. Mr.
Fry ...only on Friday night. Each movie costs $5 .... Each movie is
generally shown for a whole week. ...Themanager of the theater offers
a package to those who to do the movies on Mondays. Although tickets
are $5, the manager will sell a three-pack for $12. The three-pack can be
used on any three Mondays during the next month. Mr. Munn looks over
the schedule . . . and sees only two movies he is interested in seeing. So
he decides not to buy the three-pack. Instead, he pays $5 on each of the
first two Mondays of the month to see a movie. Then there is a change
in the schedule. ...The manager substitutes a new movie that both Mr.
Munn and Mr. Fry are somewhat interested in seeing.
The subjects felt that Mr. Fry would be more likely to see the new movie. Both could
see it for $5, but Mr. Munn would see the extra expenditure as wasteful. Arkes also
cites a real example: “While I was writing this manuscript, someone offered to take
three of us to the movies .... When we arrived at the theater, he was aghast at the
ticket prices — $7.25 each! The four tickets would cost him $29. Someone pointed
out that he could buy a strip of six tickets for only $25. He refused. ‘What would I
do with the two extra tickets’ he asked. ‘They’d just go to waste.’ ” 3
Larrick, Morgan, and Nisbett (1990) explained to subjects, with some examples,
why the sunk-cost effect was an error. Specifically, decisions should be made on the
basis of future consequences. (Past expenditures — such as paying for an indoor
tennis court — should not affect choices when they do not affect their future consequences:
If the weather is better for playing outside, then we should play outside,
regardless of the past.) In a telephone survey conducted four to six weeks after the
training, subjects in the training condition were slightly more likely to say that they
had bought an object and not used it. People who rent a videotape, find it dull, and
then force themselves to watch it all so that they “don’t waste money” are victims of
this effect, and it appears that training can reduce the number of such victims.
The reference price
We have already seen that subjects tend to evaluate outcomes by comparing the outcomes
to their reference point. A number of other reference points seem to be involved
in decision making. In purchasing behavior, one common reference point is
the idea of a fair price, or market price, or what Thaler (1985) calls a reference price.
Consider the following scenario:
3 Another reason for the sunk cost effect is that people feel that they ought to punish themselves, to
teach themselves a lesson for making a bad decision (Bornstein and Chapman, 1995), thus, arguably,
compounding one bad decision with another. The effect can also be explained in terms of regret, in the
sense of self-blame (Arkes and Blumer, 1985, p. 137). If we spent the $9 million “for nothing,” we might
regret it more than if we “at least got something.” Finally, Thaler (1980, pp. 47–50) explained the sunkcost
effect in terms of prospect theory’s Value function. The explanation in terms of waste avoidance
seems to be the main one.